Chari Boru Bariso's Econ Guidses

Ethiopian Economics Association
Economic Development,
Population Dynamics, and
Welfare
Editors:
Mengistu Ketema and Getachew Diriba
February 2021
Addis Ababa, Ethiopia
Copyright 2021 by Ethiopian Economics Association (EEA)
All rights reserved.
ISBN – 978-99944-54-81-5
Printed in Addis Ababa, Ethiopia

February 2021.
No part of this publication may be reproduced, stored in a retrieval

system, or transmitted in any form or by any means: electronic,
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or otherwise, without the prior written permission of the Ethiopian
Economics Association.
The analysis and policy recommendations of this Report do not

necessarily reflect the views of the Ethiopian Economics
Association, its Executive Committee or its members. The Report
is the product of the team of experts in the Ethiopian Economic
Policy Research Institute and external consultants and advisors.
Inquiries should be addressed to:

P. O. Box 34282
Tel: 011 645 32 00, 3329, 3041
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e-mail: info@eea-et.org
Website: http://www.eea-et.org
ii
Table of Contents
Foreword.................................................................................... xv
CHAPTER ONE .........................................................................1
1. Linkages among Economic Development, Urbanization,
Population Dynamics and Urban Welfare in Ethiopia ............2
1.1. Introduction .................................................................2
1.2. Conceptualizing Population, Economic
Development and Welfare Outcome .....................................4
1.2.1. Developmental Discourse.....................................4
1.2.2. Population, Urbanization, Migration, and
Economic Development .....................................................12
1.3. Organization of the Book .........................................19
References ..............................................................................20
CHAPTER TWO ......................................................................23
2. Macroeconomic Outlook, Structural Change and Policy
Options in Ethiopia: Achievements, Aspirations, and
Prospects ....................................................................................24
2.1. Introduction ...............................................................24
2.1.1. Background and Motivation ..............................24
2.1.2. Research Objectives ...........................................28
2.1.3. Overview of Scope, Research Methods, and Data
Sources 29
2.2. Trends in Macroeconomic Indicators in Ethiopia .29
2.2.1. Key Policies and Strategies ................................29
2.2.2. Drivers of GDP Growth .....................................32
iii
State of the Ethiopian Economy 2020/21
2.2.3. Export Trends .....................................................38

2.2.4. Poverty and Inequality .......................................41
2.2.5. Human Development .........................................43
2.2.6. Labor Market......................................................45
2.2.7. Inflation ..............................................................46
2.2.8. Current Account Deficit .....................................47
2.2.9. Fiscal Trends ......................................................49
2.2.10. Debt Trends ........................................................50
2.3. Drivers of Productivity and Structural
Transformation .....................................................................51
2.3.1. Aggregate Productivity and Structural Change 51
2.3.2. Driver of Economy-Wide Productivity ..............60
2.4. Prospects of the Ethiopian Economy .......................65
2.4.1. Macroeconomic Prospects .................................66
2.4.2. The Impact of the Covid-19 Pandemic on the
Ethiopian Economy............................................................72
2.5. Conclusions and Policy Implications .......................75
2.5.1. Key Findings ......................................................75
2.5.2. Policy Implications .............................................77
References ..............................................................................82
Appendix ................................................................................90
CHAPTER THREE ..................................................................93
3. Urbanization and Development in Ethiopia: Policy
Issues, Trends, and Prospects ..................................................94
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TABLE OF CONTENTS
3.1. Introduction ...............................................................94

3.2. Urbanization and Development: Theoretical
Overview ................................................................................97
3.3. Data Sources and Empirical Framework .............102
3.3.1. Data Sources ....................................................103
3.3.2. Empirical Framework ......................................106
3.4. Policies, Strategies, and Institutions of Urbanization
in Ethiopia ...........................................................................109
3.5. Drivers, Trends and Patterns of Urbanization in
Ethiopia ................................................................................112
3.5.1. Measuring Urbanization ..................................114
3.5.2. Urban Systems 1984-2021................................116
3.5.3. Urban Growth and City-Size Distribution
between 1984 and 2021 ....................................................118
3.5.4. Urban Primacy or Urban Concentration ........124
3.5.5. City-Size Mobility .............................................129
3.6. Associations of Urbanization with Ethiopia’s Urban
Economy ..............................................................................130
3.6.1. Urbanization and Economic Growth Links ....130
3.6.2. Urban Employment and Inequality Trends.....134
Source: Author based on CSA UEUS data .......................138
3.6.3. Urbanization, Housing and Basic Services .....138
3.7. Conclusions and Policy Implications .....................142
References ............................................................................148
v
CHAPTER FOUR...................................................................159
4. Population Dynamics and Rural-Urban Migration in
Ethiopia: Challenges and Opportunities...............................160
4.1. Introduction .............................................................160
4.1.1. Background of the Study .................................160
4.1.2. Objectives ..........................................................165
4.1.3. Research Questions ..........................................165
4.2. Methodology, Research Strategy and Design .......166
4.2.1. Data Sources and Assessment of Data Quality
166
4.3. Population Dynamics ..............................................171
4.3.1. Introduction ......................................................171
4.3.2. Population Size and Growth ............................172
4.3.3. Age Structure of the Population ......................183
4.3.4. Implications for Harnessing the Demographic
Dividend 189
4.4. Rural–Urban Migration .........................................194
4.4.1. Characteristics of Rural–Urban Migrants ......197
4.4.2. Urban Destinations of Rural Urban Migrants 201
4.4.3. Causes and consequences of rural-urban
migration Causes: The Pull-and-Push Factors .................202
4.4.4. Correlates of Rural–urban Migration .............209
4.4.5. Challenges faced by urban migrants ...............211
4.5. Summary, Conclusions and Recommendations ...212
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TABLE OF CONTENTS
4.5.1. Summary and Conclusions ..............................212

4.5.2. Recommendations ............................................214
References ............................................................................217
CHAPTER FIVE ....................................................................229
5. Multidimensional Poverty and Inequality in Urban
Ethiopia ....................................................................................230
5.1. Introduction .............................................................230
5.2. Research Methods ...................................................236
5.2.1. Dimensions and Indicators ..............................236
5.2.2. Aggregation of Multidimensional Poverty and
Inequality..........................................................................241
5.2.3. The Dataset: Ethiopia Socioeconomic Survey 243
5.3. Multidimensional Welfare Measures ....................244
5.3.1. Characteristics of Urban Households .............244
5.3.2. Unidimensional Poverty, Deprivations, and
Inequality..........................................................................248
5.3.3. Multidimensional Poverty and Inequality .......256
5.3.4. Sources of Multidimensional Poverty and
Inequality..........................................................................264
5.4. Conclusions and Policy Implications .....................274
5.4.1. Conclusions ......................................................274
5.4.2. Policy Implications ...........................................277
References ............................................................................279
Appendices ...........................................................................286
vii
CHAPTER SIX .......................................................................303

6. Synthesis, Conclusion and Policy Implications ............304
6.1. The Interface of Population, Urbanization, Welfare
and Economy .......................................................................304
6.2. Findings and Policy Options ..................................312
6.3. Specific Recommendations .....................................318
References ............................................................................325
viii
TABLE OF CONTENTS
List of Tables
Table 2 1: Export shares by sector ..........................................40

Table 2.2: HDI Trends ..............................................................44
Table 2.3: IHDI for 2018 and comparison ..............................45
Table 2.4: Urban unemployment rates ...................................45
Table 2.5: Drivers of current account deficit .........................48
Table 2.6: Value-added, Employment, Productivity, and
Relative Productivity ..............................................56
Table 2.7: Structural Transformation: Decomposition by ISIC
4 (13 sectors) ............................................................58
Table 2.8: Variables and estimation results of the growth
accounting decomposition ......................................63
Table 3.1: Evolution of city-size group by year, 1984-2037.117

Table 3.2: Evolution of urban population and projected rates,
1984-2037 ...............................................................121
Table 3.3: Estimation of rank-size parameters ....................126
Table 3.4: Change of city-size group over the years (1994, 2007
and 2017) ................................................................130
Table 4.1: Categories of explanatory variables ....................170

Table 4.2: Infant and Under-five Mortality by Region: 2000–
2016.........................................................................178
Table 4.3:Total fertility rate by region: 2000 – 2016..............182
Table 4.4: Age Dependency and Potential Support Ratios (PSRs)
................................................................................189
Table 4.5: Migrants Demographic and Social Characteristics
................................................................................200
Table 4.6: Results of the Logistic Regression Model ...........210
ix
Table 5.1: Dimensions, indicators, weights and deprivation

cut-offs for multidimensional welfare ................238
Table 5.2: Demographic and socioeconomic characteristics of
urban households by town size ...........................246
Table 5.3: Monetary poverty and inequality indices in urban
Ethiopia: 2015/16 .................................................249
Table 5.4: Unidimensional deprivations in monetary and
nonmonetary welfare indicators in urban Ethiopia
by head’s sex and location: 2015/16 ...................251
Table 5 5: Multidimensional poverty and inequality indices in
urban Ethiopia: 2015/16 ..........................................260
List of Appendix Tables
Table A1: Distribution of urban households interviewed in

ESS 2015/16 by region and town size ...............290
Table A2: Multidimensional poverty and inequality at various
cut-offs in urban Ethiopia: 2015/16 ..................292
Table A3: Correlations between indicators and
multidimensional poverty and inequality
measures in urban Ethiopia: 2015/16...............293
Table A4: Correlates of monetary poverty and child nutrition
in urban Ethiopia: 2015/16 ...............................294
Table A5: Correlates of deprivations in selected living
standards indicators in urban Ethiopia: 2015/16
.............................................................................297
Table A6: Correlates of multidimensional poverty and
inequality in urban Ethiopia: 2015/16 .............300
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TABLE OF CONTENTS
List of Figures
Figure 1.1: Interrelationships among population dynamics,

welfare, and economic development ........................7
Figure 2.1: GDP and GDP per capita growth (at 2015/6 prices)
..................................................................................33
Figure 2.2: GDP and GDP per capita growth for selected
periods (2015/6 prices) ............................................33
Figure 2.3: Sectoral Drivers of GDP Growth (% contribution
to growth).................................................................34
Figure 2.4: Trends in sectoral shares of GDP ........................35
Figure 2.5: Value added shares of the components of the
industrial sector .......................................................36
Figure 2.6: Expenditure components of GDP (%) .................37
Figure 2.7: Shares of Investment and domestic saving in GDP
..................................................................................38
Figure 2.8: Export as a percentage of GDP in selected
countries ...................................................................39
Figure 2.9: Trends in poverty headcount ratio ......................42
Figure 2.10: Inequality trends (Gini Coefficient) ...................42
Figure 2.11: Inflation, annual percentage change in CPI......47
Figure 2.12: Trends in trade balance (in millions of USD) ...48
Figure 2.13: Tax revenue as percentage of GDP ....................49
Figure 2.14: Fiscal deficit as a percentage of GDP ................50
Figure 2.15: Gross debt as a percentage of GDP ...................51
Figure 2.16: Disaggregated decomposition of productivity by
sector (ISIC-4) for 2010 and 2019 ..........................59
Figure 2.17: Contribution shares of capital deepening and TFP
for aggregate labor productivity ............................65
xi
Figure 2.18: Real GDP trends: linear forecast (Million of ETB)

..................................................................................66
Figure 2.19: Linear real GDP growth forecast .......................67
Figure 2.20: Linear forecasts for selected macroeconomic
variables ...................................................................68
Figure 3.1: City-size by Regional States, 1984-2037 ............123

Figure 3.2: Plot of rank-size distribution by years...............128
Figure 3.3: Distribution of urbanization, employment and
sectors contribution to GDP, 1990-2020.........133
Figure 3.4: Trends of employment by industry, 2003 – 2018
............................................................................136
Figure 3.5: Gini coefficient of wage per hour adjusted for
Regional State CPI, 2003 - 2018 ......................138
Figure 4.1: Trend in Total Population size and Growth Rate:

2008-2037 ..........................................................173
Figure 4.2: Urban and Rural Population Size and Growth
Rate: 2008-2037 ................................................175
Figure 4.3: Infant and Under-five Mortality rate ...............177
Figure 4.4: Life expectancy at birth: 1990 – 2020 ................179
Figure 4.5: Trend in total fertility by Urban-Rural Ethiopia
(1990-2016) ........................................................180
Figure 4.6: Total Fertility Rate: Ethiopia and sub-Saharan
Africa .................................................................181
Figure 4.7: Age structure of the population of Ethiopia in 2007
and 2037 ............................................................185
Figure 4.8: Distribution of total, urban and rural population by
broad age groups (< 15, 15 – 64 and > 65): 2007 –
2037 ....................................................................187
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TABLE OF CONTENTS
Figure 4.9: Growth rate of total population and working age

population .........................................................191
Figure 4.10: Type and Distribution of Internal Migration in
Ethiopia .............................................................195
Figure 4.11: Distribution of Rural-Urban Migrants aged
fifteen and over, by Region (2005 and 2013) ..196
Figure 4.12: Age Distribution of Migrants (2005 and 2013)
............................................................................198
Figure 4.13: Urban Destination of Rural Migrants .............202
Figure 4.14: Push-and-pull Factors of Rural to Urban
Migration in Ethiopia ......................................203
Figure 4.15: Reasons for Migration by Gender (2005 and 2013)
............................................................................204
Figure 4.16: Migrant Education and Employment status, by
Age (2005 and 2013) .........................................207
Figure 5.1: Deprivations in monetary and nonmonetary

indicators in urban Ethiopia by region (%)...254
Figure 5.2: Urban monetary and multidimensional poverty
headcounts and inequality by region and
urbanization rate: 2015/16 ..............................263
Figure 5.3: Contributions of dimensions and indicators to
overall multidimensional poverty in urban
Ethiopia: 2015/16..............................................266
Figure 5.4: Contributions of population groups to
multidimensional poverty in urban Ethiopia:
2015/16...............................................................267
Figure 5.5: Contributions of regions to multidimensional
poverty in urban Ethiopia 2015/16 .................268
xiii
Figure 5.6: Effect of universal coverage of publicly provided

basic services on multidimensional welfare in
urban Ethiopia: simulated ...............................272
Figure 5.7: Recent trends of economic growth and monetary
and multidimensional poverty and inequality in
Ethiopia: 2000–2016 .........................................273
List of Appendix Figures
Figure A.1:Density curves of weighted deprivation scores in

urban Ethiopia by town size .............................291
xiv
Foreword
Ethiopian Economics Association (EEA) is a non-profit,

non-partisan, and an independent research and membership
organization in Ethiopia. Since its establishment in 1991, EEA
strives to: a) provide its members a platform of network,
experiential learning, and access to current information; b)
undertake evidence-based analysis on an evolving social,
economic and the environment realities of Ethiopia for informing
policymakers, practitioners, investors, researchers, development
partners and the general public; c) contribute, more broadly, to
frontier and emergent economic thinking relevant for Ethiopia, to
advance research methodologies, contribute to academic rigor, and
development processes.
With the view of consistently providing an independent
and professional overview of the Ethiopian economy, the
Ethiopian Economics Association has been producing ‘Annual
Report on the Ethiopian Economy’ which usually evaluates the
performance of almost all sectors and made in-depth analysis on
one selected thematic topic. This year, EEA has changed this
approach and envisioned to produce a technical study framed as
the State of the Ethiopian Economy (SEE) often taking two or
more sectoral themes that intersect each other. Thus, the State of
the Ethiopian Economy (SEE) will be a flagship report of the EEA
which will be issued once in two years and it replaces the former
Annual Report. The SEE is conceived as a dynamic and living
document which looks into not only the current and the past
economic performance but also offers the future diagnostics of
social and economic issues of Ethiopia. It is an expression of
EEA’s responsiveness to the comments and suggestions of its
clients and partners, and a realization of change with the time
xv
thereby offering realistic and informative social, economic and

policy analyses. It aims to contribute to a deeper understanding of
social and economic issues; inform policymaking; contribute to
the design of operational programs and investment options; and
initiate further research and debate; and serve as an important
reference document.
This first report, SEE 2020/21, covers Urbanization,
Population Dynamics, Welfare and Economic Development in
recognition of their interrelationships. However, it has to be noted
that though the themes of SEE 2020 contain four sectoral areas,
the SEE is a single, interlinked and holistic study bringing salient
features of population, migration, urbanization and welfare to be
informed by and further informing economic development. A new
dimension that is added in the SEE is that, in contrary to the
traditional approach of a single sector analysis, SEE has made a
thorough analysis among interrelated themes. Accordingly, the
current SEE 2020 explored the interlinkages among urbanization,
population dynamics, and welfare and their implications to
macroeconomic development and made holistic policy
implications.
The report has tried to trace back 10 years and look 10
years into the future end beyond on each theme where data permits.
It also integrates spatial and gender dimensions including
urban/rural dynamics, and pull-push factors into the overall
analysis.
Keeping in mind policymakers, program planners,
investors, development partners, researchers/scholars and the
general readers, the report blends robust conceptual and
methodological approach with ease of accessibility to non-
economists. The report has drawn several policy implications and
key messages that can encourage policy makers, programmers,
xvi
FOREWORD
investors and development partners to renew their commitment to

a broader micro- and macroeconomic agenda, including a coherent
population and urbanization strategy, transformation of productive
sectors of the economy as well as domestic resource mobilization
the details of which can be read in the document.
EEA very much hopes that this report would be useful to
all categories of readers, particularly to policy makers who have
key roles in guiding the economic and social activities.
Finally, I would like to express my appreciation to all
people whose contribution has made this report possible.
Tadele Ferede (PhD)

President
xvii
CHAPTER ONE
Linkages among Economic Development,

Urbanization, Population Dynamics and Urban
Welfare in Ethiopia
Mengistu Ketema1 and Getachew Diriba2
1
Senior Researcher, Ethiopian Economics Association
E-mail: mengistu.ketema@eea-et.org
2
CEO of Ethiopian Economics Association from December 2019 through
December 2020 during the design and production of this study. Currently
he is an independent researcher.
E-mail: gdiriba@yahoo.com
1
1. Linkages among Economic Development,
Urbanization, Population Dynamics and
Urban Welfare in Ethiopia
1.1. Introduction
This chapter of State of the Ethiopian Economy 2020

presents important core concepts - urbanization, population
dynamics, and urban welfare - and their roles in macroeconomic
development, and vice versa. Ethiopia faces massive
developmental opportunities and challenges. It has very young and
dynamic segment of its population; untapped potential to double,
triple even quadruple production and productivity of the
agricultural and manufacturing sectors. At the same time,
underemployment, unemployment, reliance on traditional methods
of production, and very low rate of transformation processes
bedevils the quest for growth. The underlying question for
development practitioners and policymakers is what triggers rapid,
sustained and inclusive development, and how the specific sectoral
policies and programs influence other sectors.
State of the Ethiopian Economy 2020 (SEE) is a flagship
project of the EEA which will be issued every year and it is a major
departure from the former Annual Report. The SEE is conceived
at a time Ethiopia is developing a ten-year development plan,
which strives to bring about inclusive development and prosperity;
increased income per capita, meet basic needs of the population,
and utilize national potential. The plan has ten pillars of
development (Ten Year Development Plan, 2020: 71):
• Ensure quality economic development and collective
prosperity;
2
Linkages among Economic Development, and Urbanization, …
• Economic productivity and competitiveness;

• Ensure sustainable development finance;
• Ensure private sector lead in the economy;
• Inclusive development and participation;
• Peace, inclusive regional economic cooperation;
• Justice for all, and good governance;
• Ensure structural transformation;
• Develop strong green economy; and
• Build technological and digital capacity.
The SEE is conceived as a dynamic and living document

which examines not only the current and the past economic
performance but also assesses the future opportunities of social
and economic agenda. It is an expression of EEA’s responsiveness
to the changing demands for rigorous and informed policy options,
and a realization of change with the time thereby offering realistic
and informative social, economic and policy analyses. It aims to
contribute to a deeper understanding of social and economic issues
and inform policymaking, contributes to the design of operational
programs, investment options, and initiates further research and
debate, and serves as an important reference document.
To an extent data permits, the ambitions of the study is to
trace back 10 years and look 10 years into the future and beyond.
Again, contingent on data availability, spatial and gender
dimensions including urban/rural dynamics, and pull-push factors
are incorporated into the study. The report keeps in mind
policymakers, program planners, investors, development partners,
and researchers/scholars. In keeping with demands of EEA
readers, the report blends robust conceptual and methodological
approach with ease of accessibility to non-economists. This
3
chapter, therefore, explores the conceptual and policy

interlinkages among economic development, population dynamics
(fertility and mortality, urbanization, migration), and welfare.
1.2. Conceptualizing Population, Economic

Development and Welfare Outcome
While the themes of the present study contain four sectoral

areas, however, the SEE is a single, interlinked and holistic study
bringing salient features of economic development, population
(migration, urbanization) and welfare. For this reason, inter-
sectoral coordination in terms of conceptual, methodological and
analytical coherence; avoiding redundancies; and supporting
cross-reference are taken into account throughout the analysis and
write-up of the book and the chapters.
1.2.1. Developmental Discourse

The three interlinked themes discussed in the proceeding
four chapters are the study of the interrelationships among
population (rural and urban migration) on the one hand, the
national economy, and overall welfare outcomes for Ethiopians on
the other.
Typically, most research undertaking in Ethiopia appears to
have focused on a single sector analysis without seeking for how
a particular sector interfaces with other sectors. Similarly, most
policy issues are excessively focused on the macroeconomy, an
aggregate national output, the national ‘the pie’. Contrastingly,
very little efforts have been exerted to understand how population
has evolved overtime, spread geographically and how population
is organized in rural and urban spaces, and extent of migration and
urbanization processes. Population in all its spatial manifestation
4
is the ‘denominator’, the divisor of the economic pie. Welfare then

is the measure of the national economic pie and its population. It
is not just the population size that must be studied, but also the
urbanization processes that is as equally relevant factor.
Urbanization offers an opportunity for a concentrated service
delivery of education, health, roads, and basic utilities. For this
reason, urban population demands for and often forces politicians
to pay attention at the expense of the remote and sparsely
populated rural population. Furthermore, when/if population
growth and urbanization are not coherently and strategically
managed, it can lead to urban sprawling, and unbalanced national
development discourse.
The study recognizes three interlocked themes: economic
development, population (including urbanization, migration), and
welfare (see Figure 1.1). They are inextricably linked both as
concept and program of action. The interaction of population and
economic development would have direct implications on welfare
status of the country. Neither of them functions well without the
other - national economic development is unlikely to be effective
without equitable access; nor is welfare achieved without
functional and inclusive economic development.
There is a strong and persistent relationship between
population and economic growth. For example, urbanization can,
in most of the cases, be considered as an outcome of economic
growth and at the same time, when properly managed,
urbanization can fuel further growth, innovation and enterprise.
Rapid urbanization and growing urban poverty remain critical and
are closely linked to socio-economic change especially in
developing countries. Indeed, it is hard to find any country or
region of the world where sustained economic growth has occurred
without urbanization (Tacoli, 2017).
5
Although urbanization generally contributes to economic

development and hence to urban capacities, growing towns and
cities in low-income countries often face severe urban housing,
infrastructure and service deficiencies as well as various forms of
urban congestion adversely contributing to development, if not
properly managed (Owusu, 2018). During periods of rapid
urbanization, it is easy to blame these shortfalls on migration.
When net migration is adding one or two percentage points to the
growth in the number of people and households living in an urban
center, this can double the demand for new housing and
infrastructure (Tacoli et al., 2014). This in turn affects urban
welfare (employment, urban poverty levels, among others).
It is argued that despite the developmental challenges
associated with migration, it also contributes to socio-economic
development. It is important to fully appreciate the ‘push’ and the
‘pull’ factors in migration. Many governments now recognize the
potential for migration to contribute to socio-economic
development, for example, rural to urban migration, in the case of
Ethiopia eases pressure on the land and offers opportunity for land
consolidation. On the other hand, international migration, which is
not the core element in this study, requires governments to
leverage remittances from international migrants to development
sectors and to facilitate skill transfer programs in order to
maximize development benefits of migration.
Poverty can force or prevent migration, but most often it
limits the types of migration and destinations open to poor people,
and determines the conditions under which they migrate as a
livelihood strategy. In return, migration is one of the key
contributing factors to urbanization, although natural increase and
the reclassification of settlements are major contributing factors
(Awumbila, 2014). If rural-urban migration and the forces of
6
urbanization, for example, are not managed properly, growth of

informal settlements can overwhelm city growth and exacerbate
urban poverty. This means, poverty also urbanizes with growth
and urbanization (Singru, 2015).
Interrelationship among migration, urbanization and
poverty are therefore complex and highly context-specific social
processes and phenomena. There are numerous multidirectional
and multidimensional linkages between urbanization, migration
and poverty; each can act to drive or prevent the others, and each
can influence the outcomes of the others (Awumbila, 2014). A
simplified schematic presentation of the interrelationships among
urbanization, migration, urban welfare, and economic
development is depicted in Figure 1.1.
Figure 1.1: Interrelationships among population dynamics,

welfare, and economic development
Source: authors
7
As Todaro and Smith (2015: 164) pointed out, ‘many

newer theories of economic development that became influential
in the 1990s and the early years of the twenty-first century have
emphasized complementarities between several conditions
necessary for successful development. These theories often
highlight the problem that several things must work well enough,
at the same time, to get sustainable development under way. They
also stress that in many important situations, investments must be
undertaken by many agents in order for the results to be profitable
for any individual agent. Generally, when complementarities are
present, an action taken by one firm, or organization increases the
incentives for other agents to take similar actions.’
Furthermore, there are three overarching conceptual
underpinnings that help clarify the relationships among
population, the economy and welfare. First, the most enduring
theory was advanced by Thomas Malthus (1978) postulating that
population grows geometrically, while food supply only increases
arithmetically. If left unchecked, this causes the population to
outstrip food supply, which leads to a ‘Malthusian catastrophe’.
The resulting policy proposition has been to keep the population
growth in line with food supply, either by placing limit on the
growth of the population (for example, by lowering the birth rate
which is preventive checks), or a natural restriction that limits the
growth of the population by increasing the death rate (positive
checks). The underlying assumption that population continues to
grow indefinitely, and food production would not keep pace with
population growth has not come to be true in more general sense.
Production continues to expand beyond the Malthusian
imagination benefiting from successive technological changes
over the past century, and still there are a constant quest for
expanding the frontier of production.
8
On the population side, despite population boom

benefiting from health sector improvements, fertility rate as well
as population growth rates have declined among populations in
advanced economies. In fact, natural increase in population is
below a natural replacement rate (that is birth rate is lower than
death rates) thereby leading to declining population. In some
developed economies (such as Japan, Italy, Germany, etc.) birth
rates are below the natural replacement rate. Also, more globally,
advances in agricultural technologies have made it possible to
substantially increase production. While it took a century to arrive
at the present state of population transition in developed
economies, however, the case of developing countries is somewhat
different. In most developing economies, growth in population
exceeds that of growth in food production; this is not because of
limiting natural resources, but because of the way developing
countries have approached changes in technology, and the
resulting fear of creative destruction.
As readers may notice from Chapter 4, early pattern of
population transition appears to be emerging in Ethiopia, although
inconclusive, that total fertility rate (being the number of babies
born to females during their productive age) has declined from 7.1
in the 1990s to 5.2 in 2020 in rural area; whereas it has declined
from 6.6 to 4.6 in urban areas during the same time. Historically,
Ethiopia’s population growth rate was 1.87% in 1950s, 2.73% in
1970s, 3.66% in 1990s and 2.57% in 2020. While the long-term
population growth rate shows a slight decline compared to past
decades, it remains one of the highest. At this point, it is not
sufficiently clear whether or not ‘demographic transition’ is taking
place in Ethiopia.
On the other side, agricultural production and productivity
have continued to grow close to and/or below population growth
9
rate and expanded demands for food supplies. Ethiopia is lagging

entry into the full-scale modernization of agricultural and allied
sector technologies. As such, the Malthusian bomb cannot be ruled
out unless Ethiopia earnestly works in multiple fronts of
technological change.
The second, and as equally prominent scholarship on
population was advanced by Boserup (1965) that stipulates
“…human societies have had to face the problem of inter-
relationship between population growth and food production.
There are two fundamentally different ways of approaching this
problem. On the one hand, we may want to know how changes in
agricultural conditions affect the demographic transition. And,
conversely, one may inquire about the effects of population change
upon agriculture.” Boserup’s theory suggests that population
change in primitive societies will lead to agricultural
intensification with resulting increase in production. This counters
Malthusian hypothesis. While Boserup’s model of population
pressure offering or leading to increase in agricultural production
in the early stages of technological changes in agriculture (what is
typically referred to stage I and II of mechanization, i.e. reduction
or suspension of fallowing, use of ox plow, soil fertility
management, use of irrigation, improved farm management),
however, the model also faces severe limitation as the case of
Ethiopia presents, that is, population pressure has not yet induced
advanced technological adoption, at least for now. In spite of a
continued increase in production both from expansion in area
cultivated as well as limited use of agricultural inputs smallholder
farms are saturated and no longer absorbing new entrants into
agriculture (see Diriba, 2018). As the second chapter in this study
presented (see Chapter 2), rural to urban migration is taking place
on an increasing scale; land carrying capacity and labor
10
productivity have reached a diminishing return under the

prevailing agricultural technologies and practices. The combined
effects are that there are numerous rural and urban population who
are faced with chronic and transient welfare deficits across range
of variables including food, housing, water, fuelwood, and other
essential expenditure for life (see Chapter 5 on urban welfare
section).
The third framing of population issue is one that is focused
on policy prescription and advocating for labor-intensive
approach. The labor-intensive prescription is very appealing to
politicians and policy planners, especially in economies
dominantly rural and agriculture, and where manufacturing is at a
low level. Implicit in such a prescription is of the fear of
technological change and its consequences of replacing labor-
intensive traditional methods of production, hence loss to labor.
The key question is what exactly is ‘labor-intensive’ approach? A
standard description of labor-intensive is provided as an industry
or sector in which goods or services are produced with a large
amount of labor, requiring a large number of employees in order
to be successful. Labor intensity may be quantified by taking a
ratio of the cost of labor (i.e., wages and salaries) as a proportion
of the total capital cost of producing the good or service. The
higher the ratio, the higher the labor intensity. In their natural state,
labor intensive industries include agriculture, mining, and
services.
The implication of labor-intensive policy prescription is
that it assumes that technologies are labor-saving and will result in
surplus labor that cannot be employed elsewhere. This has been a
policy prescription throughout successive polities, but more so
over the past three-decades policy landscape in Ethiopia. Because
of the population increase, combined with insufficient productivity
11
in the economic sectors, and growing demand for employment

outside agriculture by the youthful population, it has become an
imperative for politicians to fall back to the default ‘natural state’
which is using one’s labor to produce goods and services as has
been throughout the millennia. Furthermore, because of low labor
and land productivity in agriculture, food supply falls short of
national and household demands, and where supplies are available,
it costs very high relative to regional and international border
prices.
1.2.2. Population, Urbanization, Migration, and Economic

Development
Economic Development
In its standard approach, development could mean
achieving sustained rates of growth of income per capita; it is also
about ‘human welfare freedom’ (Sen 1999). The most inclusive
development is declared in agenda 2030 that commits to end
poverty and hunger everywhere; to combat inequalities within and
among countries; to build peaceful, just and inclusive societies; to
protect human rights and promote gender equality and the
empowerment of women and girls; and to ensure the lasting
protection of the planet and its natural resources. It also resolves
to create conditions for sustainable, inclusive and sustained
economic growth, shared prosperity and decent work for all, taking
into account different levels of national development and
capacities (UN 2015). At the most fundamental level, development
is about the ability to meet basic needs, to be a person, freedom
from servitude and be able to choose.
12
Migration reinforcing urbanization

Migration is a significant contributor to urban growth and
to the urbanization process (Jedwab and Vollrath, 2015). Although
a rapid increase in urban population is also caused by the high rate
of natural increase in towns and re-classification of settlements
into urban areas, migration accounts for a significant proportion of
urbanization in Africa (UN-Habitat, 2014). Internal migration, and
net migration to urban areas in particular, drives the urbanization
of a country’s population. Rapid overall population growth often
overlaps with rapid urbanization, creating especially fast urban
population growth.
Migration patterns include economic migrants and forced
displaced population (due to natural hazards, political pressure,
etc.). Whether it is for economic reason or due to forced
displacement, migration leads to rapid urbanization in different
city sizes, types and their hinterland. This can be noticed in urban
sprawling, informal settlements proliferation, infrastructure
shortages, land value increase, and growing tensions between
migrants and host communities competing for scarce basic urban
services (Murillo, 2017). Hence, it can be considered that
urbanization is primarily the result of migration, and it is
reasonable to treat it as such (Tacoli et al., 2014; Owusu, 2018).
Urbanization reinforcing migration

Urbanization reinforce migration serving as a pull factor.
A growing industry around urban areas attract surplus labor from
the countryside. This creates a situation in which urban areas
require a continuous supply of rural migrants (job opportunity as a
pull factor). Furthermore, availability of better educational
opportunities, better health care services, better infrastructure,
better working conditions, better political stability and security in
13
urban areas could be among pull factors to rural people to migrate

to urban. The fact that rural population growth outpaced urban
population growth also ensures inevitability of rural-urban
migration.
Understanding what underpins urbanization and migration
and how these may change in the future is important to consider
the implications of urbanization and migration for sustainable
development. The more important policy and operational agenda
of the conditions of urbanization and detailed diagnostics of
migration is further discussed in chapter three.
Urbanization and welfare

Urbanization generates new opportunities for rural
workers, who shift out of agriculture and into more remunerative,
non-farm activities in cities (serving as a pull factor). In this way,
urbanization directly affects rural poverty as income generated
from urban areas may be used to improve livelihoods in the source
rural areas. Urbanization also entails indirect positive effects in
rural communities. The rapid growth of cities also means an
increase in the demand of agricultural goods and other products
from rural areas, which fosters economic growth and alleviates
poverty in rural areas.
The effects of urbanization on poverty are drastically
different. Fast urbanization and unregulated urban growth often go
hand in hand with poverty, inequality, disproportionate share of
slum dwellers and marginalization which decrease the ability of
cities to manage increasing pressures. However, the capacity of
urban towns to plan for and cater for the increasing migrants by
providing employment, access to land and basic amenities are
limited posing added burdens on already overwhelmed cities. As
cities develop, dramatic increases in property prices are
14
commonplace, which often displaces poorer city-dwellers who

cannot afford to live in the area anymore. Rapid urbanization may
also pose complex management problems in housing, transport,
land use, the environment, energy, public services and finance
adversely affecting urban welfare. Lack of adequate resources to
enhance the quality of urban infrastructure and promote urban
dwellers’ access to affordable housing, water, electricity, health
facilities and other social amenities (Owusu, 2018); and
inadequate investments to generate employment opportunities
(UN-Habitat, 2018) could be among the major challenges in
tackling urban poverty. This means, urbanization may adversely
affect the welfare of both migrants and urban host communities.
Generally, urbanization may contribute to poverty
reduction, especially in the rural areas, and at the same time it may
lead to increased poverty in urban areas, especially when it is not
guided properly. Local governments play perhaps the most
important role in ensuring that urbanization is inclusive and that
its benefits are shared. It is important to keep in mind that the very
large proportion of the urban population of low- and middle-
income nations that lacks access to adequate housing, basic
infrastructure and services is made up of migrants and non-
migrants (Tacoli, 2017).
Migration and poverty

The linkages between migration and poverty obviously
depends on who migrates. Labor migration is usually by young
able-bodied people. While they are often men, the gendered nature
of labor markets (both demand and supply) is context- and sector-
specific, and changing over time. For example, the expansion of
service sectors may lead to larger numbers of female migrants,
export-industries may have a preference for (young) women, and
15
cultural factors may influence the propensity of women to migrate

(De Haan and Yacob, 2009).
In terms of general linkages between migration and
poverty, migration can both cause and be caused by poverty.
Similarly, poverty can be alleviated as well as exacerbated by
migration. Poverty can be taken as a cause for migration in relation
to the fact that the poor have more propensity to migrate. People
from the poorest areas often do not have access to the most
rewarding opportunities (de Haan and Yaqub, 2009). Migration is
often seen simply as a flight from poverty. If there are no
opportunities available locally so people migrate in order to
survive. Flight from a devastating famine would appear to be the
classic example where migration is caused by poverty. The
survival migration of the poorest is likely to be mainly local, or
regional at most, and primarily within a country (Skeldon, 1997).
The poorest migrate often as an extreme survival strategy. People
from the poorest areas often do not have access to the most
rewarding opportunities, in urban areas or abroad, though they
may migrate to activities nearby, for seasonal agricultural and less
rewarding work. As survival strategies, migrants from the poorest
households include younger and more vulnerable family members
(de Haan and Yacob, 2009).
Migration may also cause poverty in urban areas. Migrants
often account for a disproportionate proportion of the urban poor
and face specific disadvantages (Tacoli et al., 2014). Migrants’
disadvantages in the cities often relate to exclusion from
citizenship rights and from social protection programs. Although
informal sector jobs are common among the urban poor, migrants
are less likely to have access to land and capital, and have higher
levels of food insecurity than non-migrants (Crush, 2012).
Moreover, migrants are often committed to sending remittances to
16
home areas to support relatives and also to repay debts, and this
can be a major drain on their incomes (Tacoli et al., 2014).
Migration, especially internal migration, helps in
alleviating poverty. According to Deshingkar (2006), internal
migration has greater potential for poverty reduction and
contributing to economic growth in developing countries than does
international migration. This is because of four things. First,
internal migration stems from a broader base where smaller sums
of money are evenly distributed to specific areas and poor families
through internal remittances (rather than international remittances,
which reach fewer people). Second, it is likely that internal
migration will continue to increase at a faster rate than
international migration. Third, internal migration involves poorer
people from poorer regions and has a strong role to play in
achieving poverty reduction goals. Fourth, it is an important driver
of growth in many sectors including agriculture, manufacturing,
construction, coastal economies and services. Hence, migration
can generally be a reaction to severe poverty, or a chosen
livelihood strategy to improve upon household wealth (Awumbila,
2014).
Migration may also exacerbate urban poverty and the
development of informal settlements. Various factors drive
migrants to congregate in particular areas of cities, including social
networks, exclusion from housing or employment in indigenous
neighborhoods, xenophobia and protection in numbers (Agyei-
Mensah and Owusu, 2009). Many of these migrant communities
emerge in urban slums as these areas become a primary destination
for internal and intraregional migrants, thus feeding into the “urban
divide” that characterizes many of Africa’s urban areas. Spatially,
the urban divide in Africa is reflected in the high incidence of
slums and informal settlements (Awumbila, 2014).
17
In addition to the poverty levels in the destination urban

areas, migration may also aggravate poverty in rural source areas.
The general finding of most studies of migration in non-disaster
situations is that it is not the poorest who move but those with
access to some resources, no matter how meagre these might
appear. Because, migration always involves some costs of
transportation and the abandonment of many of the few
possessions the poor might have. The poorest of the poor cannot
afford either risk or movement and the majority starves in situ
(Skeldon, 1997). Migrants are often not from the poorest regions,
as remoteness may make migration more difficult, and usually not
from the poorest households, because the cost of migration may be
too high (De Haan and Yacob, 2009). Hence, migrates have to sell
their or their family’s possessions in order to migrate (especially
for international migration) aggravating the poverty situation. This
would be worsening the poverty situation at least in the short-run
if migrants are successful to improve their lives, and could be for
an extended period of time if migrants fall short of their
expectations in the destination countries or cities.
There are also ways in which migration may lead directly to
an increase in the number of absolute poor. The clearest way is
through forced relocation without adequate planning and support.
In many cases, the forced relocation is essentially the product of
development, mainly through the creation of lakes and reservoirs
that are the result of the construction of dams, although
displacement for roads and urban expansion is also important
(Skeldon, 1997). Relocation that has been happening for the last
decade or so following expansion of Addis Ababa can be taken as
an example for this. Perhaps the key difference separating forced
population displacement due to development policy from other
types of migration is that the numbers moving and the timing of
18
the movements are known. Thus, if poverty is indeed the result of

the forced migration it is the fault of inadequate planning rather
than of the movement itself. Hence, there is no necessary reason
that migration must lead to an extension of poverty although this
often appears to be the result (Skeldon, 1997).
1.3. Organization of the Book
This book - State of the Ethiopian Economy 2020 - explores

the major concepts briefly discussed under this chapter. The book
is organized into six chapters. Chapter one establishes underlying
conceptual links among economic development, population and
welfare. Chapter two presents macroeconomic outlook, structural
change and policy options; chapter three presents urbanization and
development; chapter four population dynamics and rural to urban
migration; chapter five presents analysis of multi-dimensional
poverty and inequality, and prospects; and chapter six discusses
conclusions and policy recommendations.
19
References
Agyei-Mensah, S. and Owusu, G. (2009). Segregated by

neighborhoods? A portrait of ethnic diversity in the
neighborhoods of the Accra Metropolitan Area. Population
Space and Place, 16(6), 499–516.
Awumbila, M. (2014). “Linkages between Urbanization, Rural–
Urban Migration and Poverty Outcomes in Africa”. World
Migration Report 2015, Background paper, Centre for
Migration Studies, University of Ghana. International
Organization for Migration (IOM).
Boserup, E. (1965). The Conditions of Agricultural Growth.
London, George Allen and Unwin.
Crush, Jonathan (2012). “Migration, development and urban food
security”. Urban Food Security Series No 9, Queen’s
University and AFSUN, Kingston and Cape Town
de Haan, A. and Yaqub, S. (2009). “Migration and Poverty:
Linkages, Knowledge Gaps and Policy Implications”.
Social Policy and Development Program Paper Number
40, United Nations Research Institute for Social
Development.
Deshingkar, P. (2006). “Internal Migration, Poverty and
Development in Asia: Including the Excluded through
Partnerships and Improved Governance”. Institute of
Development Studies and Overseas Development
Institute.
Jedwab, R. and Vollrath, D. (2015). Urbanization without growth in
historical perspective. Explorations in Economic History, 58,
1-21.
Malthus, T. R. (1978). “An Essay on the Principles of Population”.
20
Murillo, F. (2017). “Migrants and Rapid Urbanization: A New

Agenda for humanitarian and development urban
planning?” United Nations Expert Group Meeting on
Sustainable Cities, Human Mobility and International
Migration, Population Division Department of Economic
and Social Affairs, United Nations Secretariat, New York.
Owusu, A. (2018). Urbanization and disaster in Accra, Ghana.
Does human life matters? RUDN Journal of Ecology and
Life Safety, 26 (4), 449-453
Planning and Development Commission (2020). የልማት ዕቅድ፤ ፍኖተ
ብልጽግና። 2013 – 2022.
Singru, R. N. (2015). “Regional Balanced Urbanization for
Inclusive Cities Development: Urban–Rural Poverty
Linkages in Secondary Cities Development in Southeast
Asia”. ADB Southeast Asia Working Paper Series No. 11.
Sen, A. (1999). Development as Freedom. Alfred A Knopf, New
Yorok
Skeldon, R. (1997). Rural to Urban Migration and its Implication
for Poverty Alleviation. Asia-Pacific Population Journal.
DOI: 10.18356/cd2c964e-en·
Tacoli, C. (2012). “Urbanization, gender and urban poverty: paid
work and unpaid carework in the cities”. Urbanization and
Emerging Population Issues Working Paper Series, IIED
and UNFPA, London and New York
_______. (2017). “Migration and Inclusive Urbanization”.
International Institute for Environment and Development,
London. Presented on United Nations Expert Group
Meeting on Sustainable Cities, Human Mobility and
International Migration, 7-8 September 2017, New York.
21
Tacoli, C., McGranahan, G., Satterthwaite, D. (2014).

“Urbanization, Rural–urban Migration and Urban
Poverty”. Background paper. Human Settlements Group,
International Institute for Environment and Development,
International Organization for Migration (IOM), London.
Todaro, M. and Smith, S. (2015). Economic Development. 12th
Edition. The George Washington University.
UN (2015). Transforming Our World: The 2030 Agenda for
Sustainable Development. A/RES/70/1
UN-Habitat (2014). The State of African Cities 2014: Re-
imagining Sustainable Urban Transitions. UN-Habitat,
Nairobi.
________. (2018). Working for A Better Urban Future: Annual
Progress Report 2018. United Nations Human Settlements
Program (UN-Habitat).
22
CHAPTER TWO
Macroeconomic Outlook, Structural Change

and Policy Options in Ethiopia: Achievements,
Aspirations, and Prospects
Tsegay Gebrekidan Tekleselassie1
1
Policy Studies Institute, E-mail: tsegber@gmail.com
23
2. Macroeconomic Outlook, Structural Change
and Policy Options in Ethiopia:
Achievements, Aspirations, and Prospects
2.1. Introduction
2.1.1. Background and Motivation
In the last decade and half Ethiopia has registered notable

economic growth and considerable poverty reduction. Access to
social services such as education and health have shown
remarkable progress though quality and equity issues remain. Key
issues relating to the sustainability of growth have arisen as the
growth has been largely driven by public investment in
infrastructure, resulting in government debt and fiscal space
concerns. In terms of sectoral contribution to growth, the service
sector has been the main driver despite the government’s policy of
focusing on agriculture and industry (Martins, 2014; Ferede and
Kebede, 2015; World Bank, 2016; Office of the Prime Minister,
2019). As a result, despite structural transformation being the
focus of government policies over the last decade, as underlined in
the first Growth and Transformation Plan (2010–2015) and the
second Growth and Transformation Plan (2015–2020),
achievements have been less than hoped.
Moreover, as highlighted in the recently crafted
Homegrown Economic Reform Agenda document prepared by the
government, growth in the last decade came from capital
accumulation due to heavy investment rather than total factor
productivity gains (Office of the Prime Minister, 2019). This was
confirmed by Hailu et al., (2020) who found capital accumulation
to be the main drivers of growth in Ethiopia in recent years while
24
Macroeconomic Outlook, Structural Change and Policy Options…
the contribution of overall productivity as measured by the total

factor productivity (TFP), had been small. The lack of growth in
TFP raises sustainability concerns about the growth performance
of the last decade.
Both issues, of overall productivity and structural
transformation, are important factors for sustaining growth
momentum and the creation of broad-based productive
employment. A detailed analysis of the drivers of aggregate
productivity and structural transformation is warranted to guide
policies that can ensure sustainable growth and poverty reduction.
Productivity is the efficiency with which inputs are
converted into output and it provides a key indicator of economic
effectiveness. Productivity growth is the basis for improvements
in real income and welfare. The measures of the level and growth
of productivity, therefore, represent important economic
performance indicators.
Several theoretical and empirical studies have shown that
productivity differences are at the center of differences in
prosperity among countries. Klenow and Rodriguez-Clare (1997)
attribute up to 90% of income per capita difference among
countries to total factor productivity (TFP) differences. Similarly,
Hall and Jones (1999) document that large differences of output
per capita among countries are attributable to productivity
differences which, in turn, are driven by the quality of institutions
and policies. The general consensus among development
researchers is that efficiency is at least as important as capital
accumulation for economic growth (Caselli, 2005).
A key driver of aggregate total productivity is the way
inputs are allocated in such enterprises as manufacturing firms.
Hsieh and Klenow (2009) found a larger dispersion of firms’
marginal productivities in capital and labor in China and India than
25
of firms in the US, indicating a misallocation of inputs in China

and India. They calculate this resulted in efficiency loses in terms
of TFP of 30-50% in China and 40-60% in India. This points up
the vital role of firm-level productivity for aggregate productivity
and thus of overall economic performance.
Similarly, structural transformation, can be defined as the
reallocation of resources among the sectors of the economy
(Herrendorf et al., 2014). Duarte and Restuccia (2010) defined
structural transformation as the reallocation of labor among
economic sectors. Since labor productivity is lower in agriculture,
faster and more robust structural change to the manufacturing
sector is needed for sustainable and inclusive aggregate
productivity growth that can significantly improve living standards
and reduce poverty (Gollin et al., 2002; Gollin et al., 2014; Bustos
et al., 2016). Manufacturing not only exhibits faster growth in
productivity but also a higher potential for absorbing surplus labor
from other sectors (Rodrik, 2011). The manufacturing sector is
also characterized by economies of scale generated by the
accumulation of human capital through on-the-job-training and
learning (Lucas, 1988). Additional reasons for structural
transformation include the fact that growth in the urban sector,
both in manufacturing and service sectors, can boost demand for
agricultural and agro-processed goods and positive externalities
resulting from the agglomeration effects of urbanization (World
Bank, 2016b).
Much of the difference in growth among countries come
from labor productivity differences arising from the patterns of
structural change rather than from differences within sector
productivity (McMillan and Rodrik, 2011). As such, Ethiopia can
achieve substantial productivity gains from structural change.
Page (2011) demonstrates that if Ethiopia’s economic structure
26
shifted to that of a typical African state middle-income economy,

its per capita income would double.
Most studies on structural transformation have focused on
the development path of the today’s advanced economies
(Herrendorf et al., 2014). Emerging economies, such as China,
South Korea, and countries in Latin America, have also received
modest attention. Dekle and Vandenbroucke (2012) found that
sectoral productivity differences and a decline in size of the
government triggered structural transformation in China, while
studies such as Teignier (2018) found trade to have played a key
role in South Korea’s structural transformation. Research on
structural transformation in Sub Sahara African countries remains
limited. Herrendorf et al., (2014) emphasizes the need to conduct
more quantitative studies on structural transformation in less
advanced countries to understand their development paths.
Rigorous studies on structural transformation in Ethiopia
remains limited. Martins (2014), Ferede and Kebede (2015) and
Hailu et al., (2020) are the notable examples of studies on
structural transformation in Ethiopia. Martins (2014) and Ferede
and Kebede (2015) focus on the period before 2013, and while
Hailu et al. (2020) uses more recent data, the analysis focus on
three major categories of agriculture, service, and industry without
further disaggregation.
The current study concentrates on the state of structural
transformation in Ethiopia using data from two decades (2000-
2019) and detailed sectoral disaggregation. It also addresses the
drivers of aggregate productivity by analyzing the relative
importance of TFP and capital accumulation over the last two
decades. And in addition to a detailed analysis of structural
transformation and the drivers of aggregate productivity, it
provides an overview of Ethiopia’s macroeconomic performance
27
using updated data. Future research on detailed sector-specific

constraints on structural transformation such as challenges of
modernizing agriculture, manufacturing, and service sectors is
warranted. Such studies will contribute to disentangling the factors
for slow structural transformation in the Ethiopian economy.
The recently crafted Homegrown Economic Reform
(HGER) agenda aims at addressing some of the sustainability
challenges the economy has had to face after more than a decade
of double-digit growth. Focusing on three pillars of reform,
macroeconomic, sectoral, and structural, the reform agenda aims
to make the private sector the driver of economic development.
The government of Ethiopia has developed a Ten-year perspective
plan to guide development in the country for the period 2020-
2030. The plan is centered around creating a stronger forward and
backward linkage among the economic sectors; provision of
special support to priority sectors based on their potential for high
productivity, employment, and their ability to support other
sectors; making the private sector is the true engine of economic
growth; and strengthening public-private partnerships. The
priority sectors identified are modern agriculture, manufacturing,
mining, and tourism.
The current study provides some key recommendations
that can be implemented as part of the homegrown economic
reform agenda and the ten-year perspective plan being
implemented by the government.
2.1.2. Research Objectives

The proposed research also aimed to assess and measure
the level of achievement in macroeconomic development
endeavors, by assessing and updating various economic
development indicators and their prospects, to help identify
28
possible alternative policy options for Ethiopia. The study focuses

on examining macroeconomic development over the past decade.
The current and future impact of the Covid-19 pandemic on the
Ethiopia economy is also addressed through a systematic review
of studies.
Specifically, the study addresses the following issues:
Measuring the level of macroeconomic development using such
indicators as GDP, GDP per capita, GDP growth rates, inequality,
and the human development index; assessing achievements based
on different macroeconomic indicators; examining the sources of
macroeconomic imbalances, if any, in Ethiopia; examining the
prospects and challenges of sustaining broad-based economic
growth through structural transformation; and identifying feasible
macroeconomic policy options for achieving the intended
development goals in Ethiopia.
2.1.3. Overview of Scope, Research Methods, and Data

Sources
The main data sources used are the national accounts’ data
from the Planning and Development Commissions, the National
Bank of Ethiopia, Penn Tables (Feenstra et al., 2015), the World
Bank’s World Development Indicators, the IMF, and the 2015/16
Social Accounting Matrix (SAM) data prepared by the FDRE
Policy Studies Institute. The main quantitative methods applied are
national accounting and various decomposition methods as well as
time-series forecasting tools.
2.2. Trends in Macroeconomic Indicators in Ethiopia

2.2.1. Key Policies and Strategies
Economic policies and strategies in Ethiopia since the
1990s have been prepared against the backdrop of the overarching
29
Agricultural Development Led Industrialization (ADLI) strategy

(FDRE/MoInfo, 2002; Gebreeyesus, 2013). Five-year national
development plans were prepared, accompanied by sector
development plans for education, health, roads and other areas.
During the Sustainable Development and Poverty Reduction
Program (SDPRP) of 2002-2005, the agricultural sector was the
center element of the program along with social (education and
health) and physical infrastructure such as roads (MoFED, 2002).
Despite coinciding with the industrial strategy of 2002, it does not
identify the industrial sector as a key focus of the program. The
Plan for Accelerated and Sustained Development to End Poverty
(PASDEP), a five-year development plan for the period 2005–
2010 built on the previous SDPRP (MoFED, 2005), but one of its
pillars, in relation to entrepreneurship, was the creation of
employment opportunities specifically in urban areas, focusing on
labor-intensive industries through promotion of Medium and
Small Enterprises (MSEs).
While the economy grew on average by 11% during the
PASDEP plan period, the structural transformation from
agriculture towards industry was not achieved as hoped. During
the first Growth and Transformation Plan (GTP) which ran from
2010 to 2015, and the second GTP (2015-2020), the industrial
sector received substantial support while still maintaining
agriculture as the main source of growth (MoFED, 2010; NPC,
2016). During the two GTPs a more active industrial policy,
aiming to transform the structure of the economy from agriculture
to industry and a higher value services’ sector, was emphasized.
Various support schemes were directed towards selected
export-oriented and import-substitution sectors such as textiles,
leather goods, cement, and pharmaceuticals. The interventions
included direct capacity building support and fiscal incentives
30
such as tax holidays, reduction of indirect taxes on capital goods

and preferential credit to selected sectors. Heavy government
investment on infrastructure was also envisaged to enhance the
competitiveness of the private sector (Gebreeyesus, 2013). The
construction of industrial parks after 2015 is a typical example of
the more active industrial policy approach being implemented
more recently.
Economic policies and strategies over the last decades
have brought fast economic growth accompanied by a substantial
reduction in poverty. However, the extent of public investment has
been one of the key factors which have led to concerns of debt
sustainability, and the private sector has failed to operate as
expected, raising sustainability concerns. Key private sector
challenges have included supply–side challenges such as logistics,
foreign exchange shortages, slow customs clearance, and the poor
quality and unavailability of inputs.
In September 2019, the government launched a three-year
comprehensive economic reform package, the Homegrown
Economic Reform (HGER) Agenda. The HGER envisions
promoting a sustainable and inclusive private investment-led
growth that creates jobs and reduces poverty. The reform agenda
is set against the background of rapid economic growth and
poverty reduction for around two decades, but also a series of
emerging challenges related to macroeconomic imbalances and
structural bottlenecks, which unless addressed, would bring the
country’s development momentum to a sharp halt. The HGER
therefore aims to drive reform on three fronts; macroeconomic,
structural and sectoral.
The government of Ethiopia has developed a Ten-year
perspective plan to guide development in the country for the period
2020- 2030 (PDC, 2020a). The plan is centered around creating a
31
stronger forward and backward linkage among the economic

sectors; provision of special support to priority sectors based on
their potential for high productivity, employment, and their ability
to support other sectors; making the private sector is the true
engine of economic growth; and strengthening public-private
partnerships. The priority sectors identified are modern
agriculture, manufacturing, mining, and tourism.
The Ten-year perspective plan aims at building a
prosperous country by following a pragmatic market-based
economic system; registering a fast and sustainable economic
growth by ensuring sustainable macroeconomic environment;
brining structural economic transformation by promoting
productivity and competitiveness; ensuring access to quality social
and physical infrastructure to citizens; and building institutions
and systems to promote rule of law and stability in the country.
It has now been one year since the HGER was launched
but there hasn’t yet been a comprehensive evaluation of its impact
and progress. There have also been concerns about the
harmonization of the HGRE with the Ten-Year Perspective Plan
currently being developed.
2.2.2. Drivers of GDP Growth

As shown in Figures 2.1 .and 2.2, real GDP growth
between 2000 and 2009 averaged 8.44% while real GDP per capita
in the same period was about 6%. For the period between 2010 and
2019, real GDP growth and real GDP per capita growth averaged
9.27% and 6.54%, respectively; the corresponding figures for the
2000-2009 period were 7.51% and 4.7%. The just concluded
decade showed a slightly higher average growth than the previous
one.
32
Figure 2.1: GDP and GDP per capita growth (at 2015/6 prices)
15.00
10.00
5.00
0.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-5.00
-10.00
Real GDP Growth Real GDP per capita growth
Source: Author’s computation using PDC data
Figure 2.2: GDP and GDP per capita growth for selected
periods (2015/6 prices)
9.27
8.44
7.51
6.54
5.67
4.70
2001 - 2009 2010 - 2019 2001 - 2019

Real GDP Growth Real GDP per capita growth
33
The growth was largely driven by substantial public

investment on infrastructure coupled with a solid performance by
the service and construction sectors that benefitted from some
modest mobility of labor from the agricultural sector. Figure 2.3
shows that out of the 9.27% average real GDP growth registered
between 2010 and 2019, the agricultural sector contributed 2.32
(25%), construction 2.5 (27%), manufacturing 0.65 (7%), and
service 3.8 (41%). In recent years, the contribution of the service
and the construction sectors to real GDP growth has been
increasing. For real GDP growth in 2001, the agricultural sector
contributed about 71% while the service sector, construction
(including mining), and manufacturing contributed the remaining
19.6%, 5.7%, and 3.7% respectively. In 2019, however, the service
sector, the construction (including mining), agriculture, and the
manufacturing sectors contributed 47.8%, 31.5%, 14.8%, and
5.9% respectively. In fact, the service and construction sectors
have become the dominant drivers of GDP growth in recent years.
Figure 2.3: Sectoral Drivers of GDP Growth (% contribution to

growth)
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
Agriculture Construciton and Mining Manufacturing Service
34
In terms of sectoral contribution to real GDP, the service

sector has overtaken agriculture since 2015 (Figure 2.4). In the
year 2000, the share of the agricultural sector to GDP was 54%
while the service sector contributed 35%. The remaining 11%
came from the industrial sector. In 2019, the service sector
contributed 40% of GDP while the agricultural sector contributed
33%. The fast-growing industrial sector contributed 27%.
Figure 2.4: Trends in sectoral shares of GDP

60.00
50.00
40.00
30.00
20.00
10.00
0.00
Agriculture Industry Service
Source: Source: Author’s computation using Planning and Development

Commission (PDC), and International Labor Organization (ILO) data
The fast growth in the industrial sector has been largely

driven by construction as shown in Figure 2.5. Since 2011, the gap
between construction and the manufacturing sector has steadily
widened. While the share of the construction sub-sector to GDP
was less than 4.9% in 2000, manufacturing was 5.8%.
Manufacturing’s share has only increased by less than 1
percentage point in the last two decades, but the share of
35
construction sector quadrupled between 2000 and 2010. The

mining sub-sector has only made a meager contribution to GDP,
and this has even declined from 0.54% in 2000 to 0.14% in 2019.
Figure 2.5: Value added shares of the components of the

industrial sector
25.00
20.00
15.00
10.00
5.00
0.00
Mining Manufacturing Construction
Source: Author’s computation using PDC and ILO data
In terms of the expenditure side of GDP, private

consumption has the highest share, hovering around an average of
about 69% in the last two decades, followed by gross capital
formation (investment) with a share of about 32% as shown in
Figure 2.6. Trade balance accounted for -16% while government
expenditure covered about 15%. While the overall share of the
expenditure components of GDP have not changed significantly in
the last two decades, there has been a shift away from government
consumption towards gross capital formation (investment). In
2019, government expenditure accounted for 9% of GDP,
36
compared to about 26% in 2000, while the share of gross capital

formation rose to 35% in 2019 from 25% in 2000.
Figure 2.6: Expenditure components of GDP (%)
80.00
60.00
40.00
20.00
0.00
-20.00
-40.00
Government Final Consumption Expenditure
Private Final Consumption Expenditure
Gross Capital Formation
Source: National Bank of Ethiopia
The increase in the share of capital formation in GDP has

been accompanied by an increase in domestic saving as shown in
Figure 2.7. This indicates domestic saving may have played a
crucial role in boosting GDP growth over the last two decades, but
the gap between investment and domestic saving also points to the
key role of foreign capital inflows in the form of loans and grants.
37
Figure 2.7: Shares of Investment and domestic saving in GDP

45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2007
2009
2011
2000
2001
2002
2003
2004
2005
2006
2008
2010
2012
2013
2014
2015
2016
2017
2018
2019
Gross Capital Formation (Investment) Gross Domestic Savings
Source: NBE (2020)
2.2.3. Export Trends

Exports as a share of GDP have either been stagnant or in
decline in the period after 2011 as shown in Figure 2.8. Its share
halved between 2011 and 2019 and it remains one of the lowest
even by Sub-Sahara African standards. In 2019, while it was close
to 8% (down from about 17% in 2011), the average for sub-
Saharan African countries was 27.5%. The agricultural sector
remained the top export earner for the country with close to 82%
of all exports coming from it as shown in Table 2.1.
38
Figure 2.8: Export as a percentage of GDP in selected

countries
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2011 2012 2013 2014 2015 2016 2017 2018 2019
Ethiopia Ghana Kenya Sub-Saharan Africa
Source: World Development Indicators (WDI), World Bank
39
Table 2 1: Export shares by sector

2017 2018 2019
Sector Value (Millions Share Value (Millions Share Value (Millions Share
ETB) (%) ETB) (%) ETB) (%)
Agriculture and related 2228 76.6 2248 79.4 2179.7 81.7
Coffee 883.2 30.4 839 29.6 764.1 28.7
Oilseeds 351 12.1 423.5 14.9 387.8 14.5
Pulses 279.9 9.6 269.5 9.5 272.3 10.2
Fruits & Vegetables 56.1 1.9 61.4 2.2 60.9 2.3
Meat & Meat Products 98.7 3.4 101.7 3.6 88.6 3.3
Live Animals 67.6 2.3 61.1 2.2 45.8 1.7
Flower 218.5 7.5 228.6 8.1 256.6 9.6
Chat 273 9.4 263.2 9.3 303.6 11.4
Industry including mining 322.8 11.1 232.6 8.2 145.3 5.4
Leather and leather products 114 3.9 132.4 4.7 117.4 4.4
Gold 208.8 7.2 100.2 3.5 27.9 1
Others 356.6 12.2 355.5 12.5 341.4 12.8
Electricity 73.4 2.5 80.5 2.8 55.7 2.1
Others 283.2 9.7 275 9.7 285.7 10.7
Total Export 2907.5 100 2836.1 100 2666.5 100
Source: NBE (2020)
40
2.2.4. Poverty and Inequality

In terms of the ‘war on poverty’, substantial progress has
been registered in the last two decades. Extreme poverty (the
percentage of the population living below the international poverty
line) fell from 55% in 2000 to 23.5% in 2015/6 (Figure 2.9). This
was, however, largely achieved by a modest growth in agriculture
rather than by any structural transformation (World Bank, 2015).
Poverty in rural areas, 26%, remains significantly higher than in
urban areas, standing at 15% in 2015/6.
Inequality, measured by the Gini coefficient which stood
at 0.35 in 2015/6, remains low by the standard of many developing
countries (Figure 2.10). However, the corresponding Gini for
urban areas in 2015/6 was 0.38 and 0.28 in rural areas, pointing to
higher inequality in urban areas. In addition, the overall low Gini
coefficient can be a reflection of a majority of people having a low
income. Indeed, the issue of inequality can eventually become a
challenge in a growing economy (in line with the well-known
Kuznets curve hypothesis) and pose the threat of political
instability (Acemoglu and Robinson, 2002). Economic policies
need to have provisions to tackle inequality.
41
Figure 2.9: Trends in poverty headcount ratio

50
45
40
35
30
25
20
15
10
5
0
1996 2000 2006 2011 2016
National Rural Urban
Source: PDC (2017)
Figure 2.10: Inequality trends (Gini Coefficient)

50
45 44.6
40
35 35
33.2
30 30 29.8
25
20
15
10
5
0
1995 1999 2004 2010 2015
Source: WDI
42
2.2.5. Human Development

In the past two decades, there has been significant progress
in human development, in health service coverage, child mortality,
life expectancy at birth, access to clean water, primary school
enrolment and literacy. The pre-primary and primary education net
enrolment rate has increased over the past decades. Similarly, the
health sector has registered substantial progress in improving
health outcomes in a number of areas, including under-five
mortality rate, primary health coverage, postnatal care coverage
and contraceptive use.
Despite the substantial progress made, the country still
faces many challenges in human development with much still to
do. The gross enrolment rate of secondary education first cycle
(grade 9-10) was expected to rise from 39.7% in 2009/10 to 62%
by 2014/15; it achieved less than 41%. Dropout rates of primary
and secondary schools remain high. Quality of education and
training at all levels remains poor resulting in rising educated
unemployment (Beyene and Tekleselassie, 2018). Recent data
from the Demographic and Health Surveys shows remarkable
progress, but maternal mortality remains high, and stunting
prevalence is higher than 40% (EPHI, 2019). The report by the
Ethiopian Public Health Institute (EPHI) also shows that the
coverage of skilled birth attendance remains low despite enormous
progress in past years, and there is room for service quality
improvement. Moreover, the achievements in improved health
outcomes have not been equitable; there have been substantial
difference between regions and by socio-economic category.
These differences are further compounded by population growth
and migration which are further discussed in chapter four, and
welfare dimension in chapter five.
43
The Human Development Index for Ethiopia improved

from 0.28 in 2000 to 0.47 in 2018 (Table 2.2). This is substantial
progress, but the country remains at the lower end of the spectrum
in the world’s human development index. Based on a measure of
human development index that accounts for inequality (IHDI),
Ethiopia scored 0.34 in 2018 compared to the SSA average of 0.38
and the average for low HDI countries of 0.35 (Table 2.3). There
is substantial room for improvement in its human development
index placing.
Table 2.2: HDI Trends

GNI per
Life Expected Mean
capita HDI
expectancy years of years of
(2011 value
at birth schooling schooling
PPP$)
1990 47.1 3.1 651
1995 49.3 2.5 573
2000 51.9 4.3 1.5 617 0.283
2005 56.2 6.6 1.9 734 0.346
2010 61.6 8.2 2.3 1,071 0.412
2015 65 8.7 2.6 1,512 0.453
2016 65.5 8.7 2.7 1,612 0.46
2017 65.9 8.7 2.8 1,714 0.466
2018 66.2 8.7 2.8 1,782 0.47
Source: UNDP (2019)
44
Table 2.3: IHDI for 2018 and comparison
in education
at birth (%)
Inequality in
expectancy
income (%)
coefficient
Inequality
Inequality
inequality
loss (%)
Overall
Human
value
IHDI
in life
(%)
(%)
Ethiopia 0.337 28.4 27.3 24.9 43.5 13.4
Sub-Saharan
0.376 30.5 30.4 29.7 34 27.6
Africa
Low HDI 0.349 31.1 30.9 30.4 37.4 25
Source: UNDP (2019)
2.2.6. Labor Market

The urban labor market in Ethiopia is characterized by
high unemployment and underemployment. During the last
decade, urban unemployment in Ethiopia stood at about 19% (Table
2.4). More than a quarter of the youth (aged 15 – 29) in Ethiopia are
unemployed. Similarly, about a quarter of women are unemployed.
Young women face an even higher unemployment rate of 34%.
Among those employed, about half are willing to work more
indicating a high level of underemployment (CSA, 2018).
Table 2.4: Urban unemployment rates

Year All ages Youth (15-29)
2003 26.1 34.3
2006 16.7 22.8
2010 18.9 24.52
2014 17.4 22.84
2018 19.06 25.3
Source: computed using the CSA Urban Employment Unemployment
Survey (UEUS)
45
The urban labor market in Ethiopia is characterized by

poor labor market information as reflected in informal labor
recruitment systems such as networks and job-referrals (Beyene
and Tekleselassie, 2018). This creates particular impediments for
young women who are more likely to stay at home in response to
cultural practices, negatively affecting their access to signal ability
(Beaman et al., 2018). This is confirmed by Beyene and
Tekleselassie who find evidence for the difficulty women face in
finding jobs unless they are matched or over-educated compared
to men.
Another important labor market indicator that shows a
skewed picture against women is the trend in real wages of
workers. Tekleselassie and Weldesilassie (2019) estimated trends
in real wages for male and female workers as well as the ratio of
wages of male to female workers. They found between 2003 and
2018 that male workers were paid more than women workers with
the highest ratio of real wages of men/women reaching 1.78 in
2010. The gap had slightly narrowed by 2018, but men were paid
62% higher than women. Readers may refer to chapter three for
the details of labor market issues in relation to migration.
2.2.7. Inflation
Average annual inflation for Ethiopia between 2015 and
2019 was 11.3%; the corresponding figures for low middle-income
countries and Sub-Saharan Africa were 3.4% and 4.4%
respectively. Similarly, average inflation for 2018 and 2019 was
14%. In a country where a quarter of the population lives under the
poverty line, double digit inflation puts significant strain on the
livelihood of people, particularly on wage earners and the retired
section of the population whose income can rarely cope with
46
inflation rates. High inflation also raises the real exchange rate,
reducing the competitiveness of exports. High inflation has
remained a major source of concern in recent years.
Figure 2.11: Inflation, annual percentage change in CPI

50.0
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
-General inflation
-30.0 -Food inflation
-Non-food inflation (core inflation)
Source: NBE (2020)
2.2.8. Current Account Deficit

Stagnant export revenue and high import bills have
resulted in a large trade deficit as shown in Figure 2.12. This has
also meant a significant current account deficit. An over-valued
exchange rate coupled with several key challenges to exports,
especially manufacturing exports, including problems with
logistics, power cuts, slow customs clearance and foreign
exchange shortages, has led to a widening current account deficit.
The shortage of foreign exchange resulting from the current
account deficit, in turn, has crippled the manufacturing sector,
turning the problem into a vicious circle. As shown in Table 2.5,
47
the key driver of the current account deficit is the low export
performance in the face of high imports.
Figure 2.12: Trends in trade balance (in millions of USD)

25000
20000
15000
10000
5000
0
2004
2013
2015
2000
2001
2002
2003
2005
2006
2007
2008
2009
2010
2011
2012
2014
2016
2017
2018
2019
-5000
-10000
-15000
-20000
Export of goods & services

Import of goods & services
Net trade in goods & services
NBE (2020)
Table 2.5: Drivers of current account deficit

2017 2018 2019
Exports 3.6 3.4 2.8
Imports 19.3 18.1 15.8
Trade Balance -15.8 -14.7 -13
Net Services -0.7 -0.2 -0.6
Net Private Transfers 6.7 7.2 6.7
Current Account Deficit (excluding
official transfers) -9.8 -7.7 -6.9
Current Account Deficit (including
official transfers) -8 -6.3 -4.7
Source: NBE (2020)
48
2.2.9. Fiscal Trends

Between 2000 and 2009, the average tax revenue/GDP
ratio was close to 11%, increasing to about 13% for the next
decade. This is very low compared to other countries. The average
tax revenue/GDP ratio for SSA countries in 2019 was about 19%;
the corresponding figure for Ethiopia in 2019 was only 11.6%.
In the period 2000–2009, the fiscal deficit as a percentage of GDP
(excluding grants) was -8.7%. When including grants, the figure
falls to -3.4%, underlining the importance of grants. In 2019, the
figures were -3.7% and -2.1%, respectively excluding and
including grants. The deficit was high before 2003 but narrowed
down steadily until 2008, before starting to surge in 2009. The
deficit again started to shrink as a percentage of GDP from 2015,
but it still remains high and continues to be a source of concern.
Figure 2.13: Tax revenue as percentage of GDP

16
14
12
10
Source: NBE
49
Figure 2.14: Fiscal deficit as a percentage of GDP

10.0
5.0
0.0
-5.0
-10.0
-15.0
Government Deficit as % of GDP (inluding grants)
Government Deficit as % of GDP (excluding grants)
Source: NBE (2020)
2.2.10. Debt Trends

In recent years the public debt/GDP ratio of Ethiopia has
been on the rise again after it exhibited a downward trend between
2000 and 2009 (Figure 2.15). Between 2009 and 2019, the ratio
rose from 35% to 58%, increasing by 23 percentage points in 10
years. The average debt/GDP ratio for low income SSA countries
was 41.5% in 2019. Ethiopia’s debt/GDP ratio is higher than the
SSA average, but the main challenge is not the size of the
debt/GDP ratio, but the fact that more slightly more than half of it
is external debt. Given Ethiopia’s poor export performance and
high current account deficit, debt servicing for external debt
denominated foreign currencies becomes particularly difficult.
50
Figure 2.15: Gross debt as a percentage of GDP

120.0
100.0
80.0
60.0
40.0
20.0
0.0
Ethiopia Low Income SSA Countries
Source: IMF (2020)
2.3. Drivers of Productivity and Structural

Transformation
To address the issues of structural transformation, we

analyze the extent of labor mobility to different sectors at
aggregate level in the period 2000-2009, using the shift-share
method of decomposing the sources of aggregate labor
productivity changes. We also decompose sectoral labor
productivity into capital accumulation (capital depending) and
total factor productivity.
2.3.1. Aggregate Productivity and Structural Change

Aggregate labor productivity, measured as a ratio of total
output (GDP) and the number of labors used or labor hours, is
51
determined by a number of factors above and beyond the capacity

or quality of labor. We used two methods to decompose the drivers
of labor productivity change. The first attempts to decompose
growth in economy-wide productivity into sector productivity
growth (within productivity) and productivity from labor mobility
across sectors (structural change). The second method decomposes
growth in economy-wide labor productivity into total factor
productivity change and capital accumulation using national
accounting methods.
Growth in aggregate labor productivity in an economy can
be attributed to three key factors. First, labor productivity within
sectors can be achieved by capital accumulation, changes in
technology, and improved management of resources. Second,
aggregate labor productivity in an economy can be enhanced by
labor mobility across sectors, notably from low productivity
sectors to higher productivity sectors. Third, a combination of
within labor productivity and labor mobility can enhance overall
labor productivity.
Following Timmer and Szirmal (2000), Mcmillan and
Rodrik (2011), Mcmillan et al., (2017), and Hailu et al., (2020),
these components of aggregate labor productivity can be
decomposed as follows
𝑃𝑡 = ∑𝑛𝑖=1 𝛽𝑖,𝑡 𝑝𝑖,𝑡 (1)
Where Pt is aggregate labor productivity at year t, βi,t refers to the

share of total labor engaged in sector i, at time t, and pi,t denotes
labor productivity in sector i, at time t. Hence, the change in
aggregate labor productivity between year 𝑡 and 𝑡 − 𝑘 (Δ𝑃𝑡 ) can
be expressed as:
52
𝛥𝑃𝑡 = ∑𝑛𝑖=1 𝛽𝑖,𝑡−𝑘 𝛥𝑝𝑖,𝑡 + ∑𝑛𝑖=1 𝛥𝛽𝑖,𝑡 𝑝𝑖,𝑡−𝑘 + ∑𝑛𝑖=1 ∆𝛽𝑖,𝑡 ∆𝑝𝑖,𝑡 (2)
Equation (2) provides the various components of the

productivity decomposition. The first term on the right-hand side
is the ‘within sector’ productivity changes which captures the
contribution of sectoral labor productivity growth to the economy-
wide labor productivity.
The second term captures ‘between sector’ productivity
changes which indicates the effect of labor mobility across sectors
in the economy. The economy-wide labor productivity, for
example, can be boosted due to the shift of labor from low labor
productivity sectors to higher labor productivity sectors.
The third term denotes ‘cross-sector’ (interaction effect)
productivity changes. This captures changes in both labor share
and labor productivity in each sector, reflecting the simultaneous
reallocation of labor among sectors.
Mcmillan, et al., (2016) suggest combining the second and
third term which can be characterized by the ‘structural change’
term. Other authors such as de Vries et al. (2015) estimate the
second and third terms separately calling them the static and
dynamic components of structural terms. Hailu et al. (2020) also
estimated the second and third term separately. However,
Mcmillan et al. (2016) argue that structural change is a dynamic
concept in itself and that the third term is difficult to interpret in
situations where reduction in employment share is accompanied
by increase in productivity making the term negative and
apparently acting as a halt on productivity when in fact it could be
seen as a positive development in sectors such as agriculture.
Hence, following Mcmillan et al., (2016) we combine the
second and third term to arrive at
53
∆𝑃𝑡 = ∑𝑖=𝑛 𝛽,𝑡−𝑘 ∆𝑃𝑡 + ∑𝑖=𝑛 𝑝𝑖,𝑡 ∆𝛽𝑖,𝑡 (3)
Table 2.6 provides summary statistics of the thirteen sub-

sectors used for decomposition on gross value added by sub-sector,
sectoral employment, value-added per workers (productivity) and
relative productivity. Between 2000 and 2009, overall labor
productivity (value-added per labor) grew from Birr 12,720 to
36,460. Most of the sub-sectors showed an increase in labor
productivity between 2000 and 2009.
Relative labor productivity (measured as the ratio of the
sectors productivity and the average economy-wide productivity)
between 2000, 2010 and 2019 is shown in the last three columns
of Table 2.6. The relative productivity of the agricultural sector
declined from 0.7 in 2000 to 0.5 in 2019, while the relative
productivity of the manufacturing sector increased from 0.98 in
2000 to 1.24 in 2019. Similarly, the construction sector exhibited
a relative productivity increase from 4.08 in 2000 to 5.6 in 2019.
The various components of the service sector have shown varying
degrees of productivity change between 2000 and 2019 as shown
in the table.
While the aggregate labor productivity of the agricultural
sector doubled between 2000 and 2019, its relative productivity in
the overall economy declined from 0.7 in 2000 to 0.5 in 2019. In
2019, the productivity of the agricultural sector was half that of the
average productivity of labor in the overall economy. Certainly,
the development process of countries has shown that agricultural
exhibits lower productivity compared to the industrial and service
sectors (Gollin, et al., 2002; Gollin et al., 2014; Bustos et al.,
2016). Duarte and Restuccia (2010) also find that improvement in
the productivity of the manufacturing sector explains up to half of
54
the overall productivity catch-up among countries.

However, the gap in productivity growth in the last decade
between the agricultural sector and the rest of the economy is of
concern as improvements in productivity in the agricultural sector
not only releases labor to other more productive sectors, but it is
also crucial for curbing inflation particularly food inflation. As
shown above, inflation has become a source of concern for both
consumers and firms. Curbing inflation not enhances the wellbeing
of consumers, particularly those in direct wage employment, it also
improves the competitiveness of firms as there will less pressure
to increase salaries of employees. When inflation is rising, workers
demand higher wages for subsistence. Moreover, curbing inflation
enhances the competitiveness of the export sector as there will be
less pressure on increasing real exchange rates (Geiger and Goh,
2012; Rusu and Roman, 2018).
55
Table 2.6: Value-added, Employment, Productivity, and Relative Productivity

Gross Valued-added Employment Value-Added per
Relative Productivity
(Billions) 2015/6 Prices (Millions) labor ('000)
2000 2010 2019 2000 2010 2019 2000 2010 2019 2000 2010 2019
Agriculture 203.65 387.90 626.97 21.08 28.32 34.45 9.66 13.70 18.20 0.70 0.64 0.50
Industry 42.03 103.55 512.09 1.79 2.94 5.01 23.52 35.23 102.31 1.71 1.65 2.81
Mining 2.02 4.65 2.66 0.03 0.16 0.31 75.55 29.95 8.61 5.50 1.40 0.24
Manufacturing 21.71 42.21 127.99 1.43 2.01 2.83 15.15 20.95 45.27 1.10 0.98 1.24
Construction 18.29 56.68 381.44 0.33 0.77 1.87 55.94 73.70 204.11 4.08 3.44 5.60
Service 131.51 328.28 759.84 4.62 7.02 12.64 28.47 46.73 60.12 2.07 2.18 1.65
Utility 3.03 5.77 14.12 0.04 0.12 0.30 77.77 47.00 46.45 5.67 2.20 1.27
Trade 41.69 107.79 268.04 1.81 2.38 3.45 22.98 45.38 77.74 1.67 2.12 2.13
Hotels and
3.24 13.42 48.14 1.03 0.67 0.78 3.14 19.91 62.04 0.23 0.93 1.70
Restaurants
Transport. and
12.12 33.72 104.44 0.16 0.34 0.67 74.78 99.94 155.62 5.45 4.67 4.27
Communications.
Financial
7.23 22.01 57.37 0.03 0.10 0.24 241.96 211.79 240.80 17.63 9.89 6.61
Intermediation
Real Estate and
12.76 45.40 79.94 0.05 0.19 0.66 274.45 236.99 121.84 20.00 11.07 3.34
Business
Public Admin and
27.13 40.57 83.66 0.36 0.41 0.40 75.19 98.49 210.60 5.48 4.60 5.78
Defense
Social Services 17.66 48.88 86.42 0.46 0.82 1.61 38.22 59.88 53.81 2.78 2.80 1.48
Other Services 6.66 10.71 17.71 0.67 1.99 4.54 9.89 5.38 3.90 0.72 0.25 0.11
Total Economy 377.18 819.72 1,898.89 27.48 38.28 52.09 13.72 21.41 36.46 1.00 1.00 1.00
Source: Author’s computations using PDC and ILO data, real values in 2015/6 prices
56
The results of the decomposition exercise based on

Equation 3 is shown in Table 2.7. We present the results for three
categories in terms of periods, namely 2000-2009, 2000-2019, and
2010-2019, as the state of structural change can be different
through time.
For the period 2000–2009, labor productivity changed by
47.17%. Most if this (37.9% - over 80% of the whole) came from
changes in productivity within sectors while 9.27% came as a
result of structural change as labor moved from low productivity
sectors to higher productivity sectors.
For the whole period under consideration (2000-2019),
value-added per labor increased by 165.62%. Out of this, 129.04
(77.92%) came from improvements in sector productivity while
the remaining 36.57 (22.08%) came from structural
transformation. For the shorter period 2010–2019, aggregate labor
productivity changed by 70.26%. Out of this, 50.84 (72.37%) came
from improvements within sector productivity while the remaining
19.41 (27.63%) came from structural transformation.
Table 2.7 shows that within sector productivity remains
the dominant driver of productivity while the structural
transformation has been slow. In the period 2000-2019 only 22%
of growth in aggregate labor productivity came from structural
transformation while about 78% came from improvements in
within productivity. Comparing the two decades 2000-2009 and
2010-2019, the latter showed a slight increase in the proportion of
the structural transformation component with close to 28% coming
from it. However, it is important to stress that despite efforts to
transform the structure of the economy towards more productive
sectors in the last decade, achievement has been much below par.
57
Table 2.7: Structural Transformation: Decomposition by ISIC

4 (13 sectors)
Contribution
Total Productivity
Sources of Labor Shares of Labor
Productivity Productivity
Growth
Period
Productivity
Productivity
Change (%)
effect) (%)
Structural
Structural
Change
(within
(within
effect)
Sector
Sector
2000 - 2009 47.17 37.90 9.27 80.35 19.65
2010 - 2019 70.26 50.84 19.41 72.37 27.63
2000 - 2019 165.62 129.04 36.57 77.92 22.08
Source: Author’s computations using PDC and ILO data
Figure 2.16 provides the extent of within sector

productivity and structural change by sub-sectors for the period
2010-2019. It shows the direction and extent that labor mobility
contributed to productivity by sub-sector and the degree of sector
labor productivity contribution by sub-sector.
As shown in Figure 2.16, while the agricultural sector
exhibited an improvement in within sector productivity, there has
also been some movement of labor towards other sectors such as
construction which exhibited both within productivity and
structural transformation. In addition to construction, sub-sectors
that benefited from within sector productivity growth and attracted
labor from other sub-sectors included trade, manufacturing (but
mostly within productivity), finance (mostly within sector
productivity) and transportation and communications. In addition
to the agricultural sector, subsectors that showed improvements in
within sector productivity but lost labor to other sectors included
mining, public administration and defense, and hotels and
restaurants.
58
In summary, within sector productivity gains have been

the major drivers of productivity in Ethiopia in the past two
decades while structural transformation remained limited. Some
sectors such as construction, trade, transport and communication,
real estate and business, and social services have attracted labor
from agriculture, public administration and defense sectors.
Figure 2.16: Disaggregated decomposition of productivity by

sector (ISIC-4) for 2010 and 2019
Other Services
Social Services
Public Admin and Defense
Real Estate and Business

Service
Finance
Trans. and Commun.
Hotels and Restaurants
Trade
Utility
Construction
Industry
Manufacturing
Mining
Agri
cult
ure
Agriculture Agriculture
-10.00 -5.00 0.00 5.00 10.00 15.00 20.00
Structural Transformation Sector Productivty
Source: Author’s computations using PDC and ILO data
59
To achieve an inclusive and sustainable structural

transformation it is imperative to address the supply-side
constraints in agriculture and manufacturing sectors. For example,
Diriba (2020) proposes a quadruple sector approach to agricultural
transformation in Ethiopia. These are (1) the centrality of
agriculture and rural transformation for the transformation of the
other key sectors; (2) the development of rural industrialization
and expanded manufacturing capacity initially focusing on agro-
processing; (3) decentralized urbanization which fuels rural and
agricultural transformation; and (4) the need for social, physical,
digital and market infrastructure and services that support
structural transformation in the economy (Diriba, 2020).
The binding constraints holding the growth of the
manufacturing sector include inadequacy of inputs such as raw
materials in quantity and quality, insurmountable logistic costs,
inefficient bureaucracy in public services such as customs
clearance, shortage of skilled manpower, and limited access to
finance (See, for example, World Bank (2015) and Tekleselassie
at al. (2018)).
2.3.2. Driver of Economy-Wide Productivity

The growth accounting method decomposes growth in
labor productivity into Capital Deepening and TFP growth. The
decomposition is derived from a Cobb-Douglas type production
function (Solow, 1957).
The growth rate of 𝑦 (labor productivity) and TFP can be
computed as:
𝑔𝑦 = 𝛼. 𝑔𝑘 + 𝑔𝐴 (4)
𝑔𝐴 = 𝑔𝑦 − 𝛼. 𝑔𝑘 (5)
60
where, g y , g A , and g k , refer to growth in output per worker,

growth in TFP and growth in capital intensity. α refers to the
contribution share of capital in the production function. The details
of the derivation of equations 5 and 6 are provided in Appendix
A.1.
In order to compute capital intensity (k) and capital
intensity growth rate, g k , we need to estimate capital stock (K) in
the equation (5). Replacing g k , g y (calculated from values of
measured labor productivity) and 𝛼 (parameter assumed by
authors based on literature) to formula (6), we obtain TFP growth
rate, g A .
The determination of capital’s share of national income
(𝛼) is challenging due to absence of data. Most studies assume a
certain share of capital in GDP. Collins et al., (1996) and Thanh
et al. 2018, assume, 𝛼 = 0.35 for East Asia and Vietnam
respectively. Hailu et al (2020) adopted a capital share, 𝛼, of 0.3
based on the 2015/16 Input-Output and Social Accounting Matrix
for Ethiopia (Andualem et al., 2018).
Growth rates of GDP, labor productivity, and TFP growth
rate in year t, are using the following:
α.gtk
Contribution share of capital deepening year t = gty
. 100(%) (7)
gt
Contribution share of TFP growth in year t = gAt . 100(%) (8)
y
The data used to compute equations 7 and 8 and the

estimated values are provided in Table 2.8. The estimated
contribution shares of capital depending and TFP for aggregate
61
labor productivity are provided in the last two columns of Table

2.8 and Figure 2.17.
The results show that in the period 2001-2011, total factor
productivity dominated the source of aggregate labor productivity
with a share of about 90% coming from it. In the period 2012-
2019, capital accumulation became the major source of aggregate
labor productivity with an average share of 68%. This reversal of
the relative importance of capital accumulation coincides with the
first Growth and Transformation Plan (2010 - 2015) and the advent
of a more active industrial policy which among other things led to
the construction of industrial parks and large public investment
initiatives. Our results are largely consistent with the finding of
Haile et al. (2020). While the importance of capital accumulation
in the start of industrialization may not be surprising, it is
important to ensure the efficiency of the capital being invested.
Low TFP in the face of high capital accumulation may indicate
waste of resources as is the case in many large public investment
undertakings. A report by the World Bank (2016a) indicated low
marginal returns to public investment in Ethiopia even by the
standard of low-income countries, despite public investment being
one of the drivers of recent growth performance. And, the shift
towards private-investment led growth has become important for
sustaining the current growth momentum.
62
Table 2.8: Variables and estimation results of the growth accounting decomposition
Contribution
Productivity (Thousand
Growth rates (%) share to labor
2011 national prices)
(Thousand USD per

productivity
GDP (Million USD
Real capital Stock

USD per Worker
Capital Intensity
growth (%)
Employment (in
(Million USD)
Productivity
Real Labor
Millions)
Worker)
intensity
intensity
Capital
Capital
Labor
TFP
TFP
2000 41567.78 27.78 1.50 109092.70 3.93
2001 45018.50 28.49 1.58 113834.00 4.00 5.62 1.76 5.09 9.41 90.59
2002 45700.34 29.15 1.57 117989.40 4.05 -0.78 1.31 -1.17 -50.07 150.07
2003 44712.71 29.86 1.50 121491.20 4.07 -4.50 0.51 -4.65 -3.41 103.41
2004 50781.45 30.69 1.65 129242.60 4.21 10.50 3.50 9.45 10.01 89.99
2005 56783.07 31.76 1.79 136718.60 4.31 8.06 2.23 7.39 8.30 91.70
2006 62935.44 32.70 1.92 145496.10 4.45 7.64 3.35 6.63 13.16 86.84
2007 70145.25 33.96 2.07 154484.40 4.55 7.32 2.24 6.65 9.18 90.82
2008 77712.98 35.48 2.19 165149.20 4.65 6.05 2.33 5.35 11.55 88.45
2009 84553.59 36.97 2.29 182642.00 4.94 4.43 6.14 2.58 41.64 58.36
63
Contribution
Productivity (Thousand
Growth rates (%) share to labor
2011 national prices)
(Thousand USD per

productivity
GDP (Million USD
Real capital Stock

USD per Worker
Capital Intensity
growth (%)
Employment (in
(Million USD)
Productivity
Real Labor
Millions)
Worker)
intensity
intensity
Capital
Capital
Labor
TFP
TFP
2010 95165.52 38.57 2.47 203709.80 5.28 7.87 6.90 5.80 26.29 73.71
2011 107684.90 40.23 2.68 233280.60 5.80 8.48 9.78 5.54 34.62 65.38
2012 116997.30 41.50 2.82 276103.00 6.65 5.32 14.73 0.90 83.11 16.89
2013 129378.20 42.87 3.02 322737.50 7.53 7.07 13.18 3.12 55.92 44.08
2014 142657.20 44.10 3.23 382718.30 8.68 7.18 15.27 2.60 63.80 36.20
2015 157473.90 45.35 3.47 458265.20 10.11 7.35 16.45 2.42 67.11 32.89
2016 169381.70 46.50 3.64 540552.90 11.62 4.88 15.02 0.38 92.31 7.69
2017 188206.20 47.92 3.93 7.83 12.38 625932.80
4.12 47.40 52.60 13.06
Source: computed using NPC, ILO, Penn World Tables (capital share is taken from Andualem et al. (2018)).
64
Figure 2.17:: Contribution shares of capital deepening and

TFP for aggregate labor productivity
200.00
150.00
100.00
50.00
0.00
2001
2009
2002
2003
2004
2005
2006
2007
2008
2010
2011
2012
2013
2014
2015
2016
2017
-50.00
-100.00
Capital intensity (%) TFP (%)
Source: computed using Penn World Tables
2.4. Prospects of the Ethiopian Economy
The prospects of the Ethiopia economy depend on several

domestic and external social, economic, political, and
environmental factors. Domestically, whether new policies and
strategies are implemented will have a significant impact on the
economy. Internal political stability will also have an important
bearing on the economy. Internationally, the global markets for
inputs and products also have a direct impact. Global shocks such
as the Covid-19 pandemic and the containment measures put in
place will have varying impact on the macroeconomic outcomes
of Ethiopia. This section considers potential challenges and
65
options and their bearing on the prospects of the Ethiopian

economy.
2.4.1. Macroeconomic Prospects

Assuming current policies remain intact and the current
growth momentum continues, average annual real GDP growth
can be expected to be about 9% in the period 2020-2030 as shown
in Figures 2.18 and 2.19. Our forecast is in line with the country’s
Ten-year Perspective plan GDP annual growth target of 10% on
average (PDC, 2020a). If this materializes, it will be a significant
achievement for the Ethiopian economy.
Figure 2.18: Real GDP trends: linear forecast (millions of ETB)

3500000000
3000000000
2500000000
2000000000
1500000000
1000000000
500000000
Actual Forecast
Source: computed using data from PDC
66
Figure 2.19: Linear real GDP growth forecast

14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1995 2000 2005 2010 2015 2020 2025 2030 2035
-2.00
-4.00
However, challenges abound from the global Corona

pandemic to internal macroeconomic imbalances including
inflation, and unsustainable current account deficit and public
debt. These will put substantial pressure on the economy and the
growth momentum can come to a halt. Figure 2.20 provides linear
forecasts of measures of selected macroeconomic imbalances.
Equally, prudent reforms as part of the Homegrown
Economic Reform Agenda, aiming at correcting macroeconomic
imbalances, easing structural bottlenecks, and addressing sector
specific challenges, can have a positive impact to unlock to
county’s potential to sustain the growth momentum and enhancing
competitiveness thereby creating decent jobs.
67
Figure 2.20: Linear forecasts for selected macroeconomic

variables
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0
Inflation rate
Trade Balance percentage of GDP
Tax-Revenue as % of GDP
Government Deficit as percentage of GDP
Our analysis has shown that the rate of structural

transformation has been slow and that recent growth was largely
driven by capital accumulation mainly from the public sector
rather than by total factor productivity improvements. This points
to a need to rebalance growth towards private sector and away
from the public sector. This is especially important given concerns
over increasing debt sustainability sand the inefficiency of the
management of large government programs (World Bank, 2016a).
Moreover, while growth in investment has become an important
driver of GDP growth, private consumption has been the main
element. Interventions aiming at the efficiency of private
investment will play an important role in sustaining the current
growth momentum.
68
Moreover, growth has been propelled by the service and

construction sectors. Performance in the manufacturing sector has
been insufficient. As the manufacturing sector is characterized by
higher risks and stiff competition from imports, there is a need to
put in place differential support programs that depend on need
rather than the one-fits-all approach that has been the case over the
last two decades. This led to a concentration of investment in
certain sectors such as real estate and construction and away from
manufacturing.
The creation of acceptable and productive employment
will be one of the major challenges for the next decade. With high
urban unemployment and under-employment and the low wages
of the employed in both rural and urban (working poverty) areas,
as well as a growing number of people particularly youth joining
the labor market, it is important to continue to support labor-
intensive industries to absorb job-seekers. In relation to this, the
skills mismatch in the labor market is another key challenge that
requires intervention. Not only is there poor quality training and
education; but the skills being produced are not the skills required
by industries. A skills-anticipation system is required to ensure
alignment of skills supplied and those required by industry.
Rising rural-urban migration and rapid urbanization, as
demonstrated in chapter three, also underline the need for thriving
industrial and service sectors. Enhancing productivity and
structural transformation towards more productive sectors needs to
be at the center of policy in the next decade.
Another key area that requires critical intervention is
inflation. The current high inflation is not only harming
consumers; it also affects firms as it pressures them to increase
salaries which affects their competitiveness. A high and rising
inflation also implies an increasing real exchange rate which will
69
affect the competitiveness of the export sector. So, resolution of

the issue of inflation, particularly food inflation, should be seen as
a direct end in itself as it affects consumers, as well as indirectly
affecting the costs of firms and their ability to employ people.
Political instability and ethnic tensions are another crucial
issue that can have a negative impact on the Ethiopian economy
by restricting the flow of foreign direct investment and trade within
Ethiopia. Hence, maintaining political stability and ensuring the
rule of law needs to be among the key priorities of the government
of Ethiopia in the coming decade.
The ongoing demonetization of the Ethiopian currency
will have a positive effect in curbing inflation to some degree as it
will increase the amount of currency circulating through official
channels, helping the National Bank of Ethiopia to estimate money
supply more accurately and conduct monetary policy accordingly.
Similarly, the daily cash withdrawal limit introduced in early 2020
and further tightened along with the demonetization, can be
expected to increase the currency circulating through official
channels and have similar effect in improving the effectiveness of
monetary policy. However, the absence of a fast banking service
and the necessary associated bureaucracy to speed up the transfer
of money from bank to bank may discourage enterprises,
particularly Micro- and Small-Enterprises, and those in rural areas,
from depositing money in banks. The NBE should monitor the
effect of daily cash withdrawals and adjust its regulation when
necessary.
Global drivers of change, such as advances in technology,
climate change, globalization, and demographic transitions
(although Ethiopia has not entered the transition stage), are among
the major factors that will shape the future of work and industries
in the period 2020-2030 (Frey and Osborne, 2015; Chang and Phu,
70
2016; ILO, 2018). Robotics and automation will start to threaten

labor in conventional labor-intensive industries such as textiles
and garments. While full automation is unlikely to replace labor in
Ethiopia in the coming ten years, semi-automation such as the use
of computer-assisted designing (CAD) is inevitable. There is
already a need to incorporate courses on relevant software in the
Technical and Vocational Education and Training (TVET), and
University systems in Ethiopia to produce a workforce that can
operate semi-automation or automation.
Climate change will pose a critical challenge to
agriculture-based raw materials such as cotton and other key inputs
for agro-processing, and investment in irrigation will be crucial to
address potential water shortage or irregularities.
Globalization will also continue to create opportunities
and threats to enterprises in Ethiopia. While technology transfer
and global markets can be seen as opportunities, relentless
competition from abroad will be a challenge for the manufacturing
sector in particular. Improving the ease of doing business will be
critical to attract investment from abroad. A productive workforce
will also continue to be crucial for coping with stiff competition
from abroad.
In summary, how to refocus the drivers of growth away
from government-led to private sector-led growth, enhancing the
productivity and competitiveness of the private sector in a
globalized world, creating productive employment opportunities
particularly for the youth, and curbing inflation, will all be key
issues in the upcoming decade. Rising migration, internal and
external, rapid technological change and increasing environmental
and social compliance requirements will also offer both
opportunities and challenges for the Ethiopian economy in the next
decade.
71
2.4.2. The Impact of the Covid-19 Pandemic on the Ethiopian

Economy
The COVID-19 pandemic has been ravaging the world
since February 2020. While countries in Africa in general and
Ethiopia in particular haven’t been affected as seriously as some
of the countries in Europe in terms of cases and deaths, they have
not been spared. According to WHO’s situation report, by the first
week of September 2020, there had been a total 27.5 million
positive cases of COVID-19, 18.5 million of whom recovered,
with a total death toll of about 900,000 people. In Africa, there
had been close to 110,000 positive cases and about 230,000 deaths.
The corresponding figures for Ethiopia were 61,000 total positive
cases and close to 1000 deaths due to COVID-19. However, as
Adam et al. (2020) underlined, public policy responses have been
largely similar with most countries in Africa also going into costly
lockdown or partial lockdown.
The COVID-19 pandemic has hit both the demand and the
supply side of the economy. Production was negatively affected as
supply chain disruption hit and economic activities slowed down
as people stayed at home. A slowdown in activities also meant a
slowdown in productivity. While health expenditure increased as
a response to the pandemic, government revenue declined as
economic activities slowed down. Even if the pandemic wasn’t so
serious in terms of cases and deaths, the containment efforts did
have significant economic costs. Countries in Africa, including
Ethiopia, have no more than a constrained fiscal space to mobilize
revenue to deal with the pandemic and provide support for the
enterprises and households affected. So many did not resort to a
complete lockdown, but rather used containment measures, best
characterized as ‘partial lockdowns’.
72
A number of studies have been conducted since March

2020 to estimate the potential impact of the pandemic on the
Ethiopian economy. The Jobs Creation Commission (JCC)
released an estimate of the impact of COVID-19 on the labor
market focusing on employment in Ethiopia (JCC, 2020). The
study assessed the effect on employment resulting from medical
and health shocks, the impact of containment measures such as
social distancing, and the global demand shocks. The result
indicates up to 727,000, 1.41 million or 2.5 million jobs would be
threatened under low, medium and high impact scenarios
respectively.
CEPHEUS Capital conducted the potential impact of the
COVID-19 on the Ethiopian economy assuming a ‘limited virus
spread scenario’ (severe disruptions to four economic sub- sectors
for the next three months followed by six months of a slow
domestic/global recovery). It found that growth would fall to 5%;
a loss of close to $1.5bn in foreign exchange; between 750,000 and
1.5mn jobs potentially affected; fiscal resources of up to Birr 90bn
(2.3% GDP) be needed for comprehensive public assistance
packages; and that central bank liquidity interventions on the order
of Birr 47 Billion (1.3% GDP) might be required (CEPHEUS
Capital, 2020).
The FDRE Planning and Development Commission
(PDC, 2020) estimated the impact of the COVID-19 pandemic on
economic growth and urban labor market using a SAM multiplier
analysis and system dynamics for two scenarios (moderate and
severe). They show that 705,000 or 1.57 million jobs would be
threatened in the moderate and worst-case scenarios respectively.
Economic growth would decline from the baseline level by 2.81
(2.6) and 3.80 (3.1) respectively in the moderate and worst case in
the short-term (long-term).
73
The Ethiopian Economic Association conducted a study

on the impact of the COVID-19 pandemic on the Ethiopian
economy focusing on the economy-wide effects, the length of time
for the economy to recover, and the adequacy of current levels of
rescue and stimulus for recovery (Beyene et al., 2020). They
estimated the impact using a Computable General Equilibrium
(CGE) model calibrated with 2010/11 data. It should be noted,
however, that the use of old Social Accounting Matrix data might
not reflect the immediate pre-COVID-19 structure of the Ethiopian
economy. The paper models the short-term (FY 2019/20 and
2020/21) and long-term (up to FY 2029/30) impacts of the
pandemic on economic growth, private investment, private
consumption, public finance (the fiscal balance, government
revenue and debt), and sectors of production and employment on
the basis of three scenarios, ‘base-case’, “mild” and “severe”. The
study found that GDP could decline by 2.2%-3.6% based on a 3-
month mild scenario or 6-month severe scenario which is
equivalent to a 2.4% and 3.9% percentage point reduction in GDP
growth. Under the mild scenario, it estimated that government
revenues might decline by 2.5 percent in FY 2019/20 and by 3.3
percent in FY 2020/21.
Hirvonen (2020) reviewed studies on the impact of the
COVID-19 pandemic on various socio-economic dimensions
based on phone surveys. Hirvonen (2020) emphasizes the
existence of significant uncertainty about its impact on income,
poverty, and food security due to the limited coverage of data
(phone surveys focus on cities) and the subjective nature of the
questions.
The major studies looking at the impact of the COVID-19
on the Ethiopia economy have shown non-trivial loss for various
dimensions of the economy. Given the uncertainty surrounding the
74
nature of the disease and the prospect of a vaccine and paucity of

data these studies can only be taken as indicative not definitive.
Careful planning of the recovery processes will be crucial, and
mobilization of funding from development partners to tackle the
impact of the pandemic and assist recovery will also be necessary.
2.5. Conclusions and Policy Implications
The current study has assessed the level of achievement

in macroeconomic development efforts in Ethiopia, evaluating
and updating various economic development indicators and their
prospects to help identify possible alternative policy options for
Ethiopia. The study has critically assessed the state of structural
transformation and drivers of aggregate productivity in the
country, using analysis of data trends and macroeconomic
decomposition methods as its main methods.
2.5.1. Key Findings

• As in other similar studies, our findings indicate that Ethiopia
has registered notable economic growth with service and
construction sectors being the key drivers. Between 2010 and
2019, real GDP and real GDP per capita grew, on average,
9.27% and 6.54% respectively. This growth was largely driven
by substantial public investment on infrastructure coupled
with a solid performance of the service and construction
sectors that benefitted from a shift of labor from the
agricultural sector. Out of the 9.27% average real GDP growth
registered between 2010 and 2019, the agricultural sector
contributed 2.32 (25%), construction 2.5 (27%),
manufacturing 0.65 (7%), and service 3.8 (41%).
75
• In terms of sectoral distribution, the service sector had the

highest share of gross valued added with 40% in 2019 with the
agriculture sector contributing 33%. Construction constituted
20.09% while the manufacturing sector had a share of 6.74%
in the same year. In terms of employment, the agriculture
sector remains the major contributor with 66% followed by the
service sector employing 24.26% of the total workforce in
2019. In the same year, the manufacturing sector, construction,
and mining covered the remaining 5.43%, 3.59% and 0.59%
of employment in the that shown by GDP distribution.
Exports continued to be dominated by the agricultural sector.
• High inflation, high urban unemployment, high
underemployment, and low wages characterize the Ethiopian
economy raising wellbeing concerns. High inflation not only
affects consumers but also the competitiveness of enterprises
as they are forced to increase salaries. The high level of
unemployment and under-employment in the face of high
investment on education results in loss of skill.
• High fiscal deficit, low share of tax revenue, and large external
debt (with low export revenue) continues to be key issues that
require further attention. Unless addressed these issues will
create problems of sustainability in financing in the economy.
• Our decomposition analysis showed sector productivity gains
are the major drivers of aggregate labor productivity in
Ethiopia. There have been recent gains from structural
transformation as sectors such as construction, trade, transport
and communication, real estate and business, and social
services attracted labor from agriculture and public
administration and defense.
• National accounting decomposition showed that in the period
2001-2011, total factor productivity was by far the largest
76
contributor to aggregate labor productivity with a share of

about 90%. In the period 2012-2019, capital accumulation
became the major source of aggregate labor productivity with
an average share of 68%. While the importance of capital
accumulation at the start of industrialization may not be
surprising, it is important to ensure efficiency of the capital
being invested. Low TFP with high capital accumulation may
indicate inefficiency of large public investments and points to
the importance of shifting to private-led investment to sustain
the recent growth momentum.
• In terms of expenditure (demand) side of GDP, with about
69% of GDP in 2019, private consumption played a key role
followed by gross capital formation (investment) with about
35%. Government expenditure accounted for about 9% and
trade balance for -13%. Between 2000 and 2019, the share of
gross capital formation increased by about 10 percentage
points while that of government consumption decreases by 15
percentage points signifying the increasing role of investment
to growth.
• Studies conducted on the impact of the COVID-19 pandemic
on the Ethiopian economy show non-trivial loss on various
dimensions of the economy. Typically, a study by the EEA
found GDP growth could decline by 2.4% - 3.9% percentage
points due to the pandemic based on mild and severe scenarios.
Carefully planning the recovery processes will be crucial.
2.5.2. Policy Implications

• Design a differential support system for enterprises based
on the level of competition they face and their strategic
importance: To enhance structural transformation, there is a
need for a special support scheme aimed at boosting the
77
productivity and competitiveness of the sector. The current

support system for enterprises in Ethiopia is uniform without
any consideration of the specific risks and competitions an
enterprise face. Manufacturing industries face stiff
competition from imports and because they continue to be
import-intensive are prone to suffer from expensive logistics.
There is, therefore, the need to design a differentiated support
system for different elements within the sector based on the
particular challenges these faces. This would increase the
share of the manufacturing sector in employment, GDP and
exports.
• Address supply-side constraints and implement a system
of sectoral linkage: The structural transformation of the
economy from agriculture and construction towards
manufacturing is empathized in the Ten-Year Perspective
Plan. However, to achieve an inclusive and sustainable
structural transformation it is imperative to address the supply-
side constraints in agriculture and manufacturing. Without
addressing the sector-based constraints, structural
transformation will not be sustainable and poverty-reducing.
Without transforming agriculture and preparing the ground for
a competitive and vibrant manufacturing sectors, the simple
exodus of labor out of agriculture to other sectors will result in
uncontrolled urban sprawl and inflation. Hence, the
transformation of agriculture is a crucial precondition for
overall structural transformation in the economy. A system of
backward and forward linkages among the various sectors in
the economy notably agriculture and manufacturing will be
important for structural transformation. While linkage is
emphasized in policy documents in Ethiopia in the last two
decades, implementation has been poor as there is no system
78
for it in place. For example, there is no incentive system for

firms that sources inputs locally from other enterprise. Hence,
it is important to have a system of linkages in place based on
experiences of successful industries in the country that takes
local context into account.
• Encourage the shift towards private sector–led
development by addressing the financial repression of the
private sector: Low TFP with high capital accumulation
appears to indicate the inefficiency of large public investments
and points to the importance of shifting to private-led
investment to sustain recent growth momentum. While the
government has reiterated its commitment to make the private
sector an engine of growth, in practice there has been little
change in recent years. Public investment continues to
dominate, crowding out credit and foreign exchange access to
the private sector. Unless the financial repression of the private
sector is addressed, sustainability of the growth momentum
will continue to be in question.
• Design a national and sector-based skills anticipation
system: The creation of a structure for expanded and
productive employment is one of the daunting challenges
facing the government in the coming decade. There is high
urban unemployment and under-employment and low wages
for the employed in both rural and urban (working poverty)
areas, and a growing number of people, youth in particular, are
joining the labor market every year. The serious skills
mismatch in the labor market is also a key challenge that
requires intervention as industries continue to struggle to find
appropriately skilled workforce despite large number of
graduates from higher education and TVET systems. Not only
is there poor quality of training and education, the skills being
79
produced are not the skills required by industry. A skills

anticipation system is required to ensure alignment of skills
with those required by industry. This can be done by the Jobs
Creation Commission or another body dedicated to
anticipating skills’ needs of the economy and able to keep
prospective graduates and the education and training
institutions informed.
• Conduct diagnostic research on the drivers of inflation in
Ethiopia: Another key area that requires critical intervention
is inflation. The current high inflation rate is not only harming
consumers, but also firms as they are forced to increase
salaries affecting their competitiveness. Inflation also affects
the competitiveness of exporting firms by raising the real
exchange rate. The issues of inflation, particularly of food
inflation, should be seen as a distinct end in itself as it affects
consumers as well as indirectly affecting the costs of firms and
their ability to employ people. A prudent monetary policy
could play a key role in curbing inflation. There is also a need
to check on large and inefficient government investments
which fuel inflation without offering any real gain for the
economy. A related key area of possible intervention is
agricultural productivity as it is directly related to the prospect
of food inflation. A first step, however, would be to conduct a
diagnostic study of the drivers of inflation. There is currently
no rigorous research on inflation publicly available.
• Design a monitoring and evaluation system for the
Homegrown Economic Reform Agenda and harmonize it
with the ongoing Ten-Year perspective plan: The recently
crafted Homegrown Economic Reform Agenda aims to
address some of the sustainability challenges the economy has
to face after more than a decade of double-digit growth.
80
Focusing on the three pillars of reform, macroeconomic,

sectoral, and structural, the reform agenda aims to make the
private sector the driver of economic development. While the
reform agenda has clearly conveyed the situation on the
ground, identified the challenges, and defined the objectives,
there is a need for a broader action plan with clear timeline and
responsible body to ensure implementation. There is also a
need for a monitoring and evaluation system to track the
impact and progress of interventions. This in turn will help
successful implementation of the Ten-Year Perspective plan.
It is crucial to ensure alignment and harmonization of the
reform agenda and the perspective plan.
81
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Appendix
Appendix 1: Derivation of the growth accounting method of

decomposing aggregate labor productivity4
The growth accounting method decomposes growth in labor

productivity into capital deepening and TFP growth. The
decomposition is derived from a Cobb-Douglas type production
function5.
𝑌 = 𝐴. K α . Lβ (1)
Where, Y, K, L, A are output, capital, labor, and TFP,

respectively.
Assuming a constant return to scale, ∝ +𝛽 = 1, dividing both

side of (1) by L
Y A.Kα .Lβ K α
= = A. ( L ) (2)
L Lα+β
Y K
Defining 𝑦 = L and = L
, then 𝑦 and 𝑘 are labor productivity and
capital/labor ratio (capital per unit labor). Equation (2) becomes:
𝑦 = 𝐴. k α (3)
4
This is based on Hailu et al. (2020) of which I am a co-author
5
Thanh et al. 2018 and Hailu et al. (2020) apply the same procedure for
Viet Nam and Ethiopia respectively.
90
Applying natural logs and differentiating both side of equation

(3),
lny = αlnk + lnA
∆lny = α∆lnk + ∆lnA (4)
Equation (4) indicates that growth in labor productivity can be

decomposed into capital intensity growth (𝛼∆𝑙𝑛𝑘) and TFP
growth (∆𝑙𝑛𝐴). By providing more amount of capital to work with,
capital intensity makes labor more productive through the
contribution share of capital in the production function (𝛼). TFP
growth enhances labor productivity growth.
The growth rate of 𝑦 (labor productivity) and TFP can be

computed as:
g y = α. g k + g A (5)
g A = g y − α. g k (6)
91
92
CHAPTER THREE
Urbanization and Development in Ethiopia:

Policy Issues, Trends and Prospects
Tsega Gebrekristos1
1
Africa Institute of Development and Governance, Ethiopian Civil
Service University, Ethiopia.
E-mail: tsegagi@gmail.com
93
3. Urbanization and Development in Ethiopia:
Policy Issues, Trends, and Prospects
3.1. Introduction
The world has undergone unparalleled levels of

urbanization over the last half century, with the highest urban
growth rates taking place in developing countries. The notion of
urbanization involves major structural, socio-economic
transformations including land-use (Surjan et al., 2016).
Consistent to this theory, empirical findings show that the relative
importance of agriculture declines as the country’s level of
urbanization increases (Davis and Henderson, 2003; Ellis and
Roberts, 2015). Urbanization is also crucial to development and
both are closely intertwined; indeed, sustained economic
development cannot be achieved without urbanization
(Henderson, 2010). Yet, in the context of developing countries,
little is understood as to how rapid urbanization processes affect
development.
A well-managed urbanization certainly facilitates growth
and development. The conventional theory and historical
experience from developed countries shows that cities are more
efficient and contributed to structural changes in the economy.
During such process, either technological change or productivity
differential leads to a shift of resources from agriculture to the
urban sector (Fujita et al., 1999). This shows a strong positive
association between urbanization and per capita income growth
(Jedwab et al., 2017) suggesting that urbanization boosts economic
growth (Buckley and Simet, 2015).
94
Urbanization and Development in Ethiopia:…
Africa’s urban transition has proved different from the

conventional perception of urbanization where the drivers,
patterns and outcomes are not uniform and do not follow past
processes (OCDE/SWAC, 2020). Recent studies in Africa
revealed that poverty is being urbanized (Ravallion et al, 2007) and
hence becoming an urban phenomenon (Dorosh and Thurlow,
2014). Many scholars argue that the rapid urbanization in Africa is
happening without the required structural transformation (Jedwab
and Vollrath, 2015; Gollin et al., 2016). This is often associated
with unplanned urbanization (Ravallion et al, 2007; Elhadary and
Samat, 2012) leading to expansion of consumption cities financed
by surpluses generated from natural resources extraction and
agriculture (Jedwab, 2012). Furthermore, in developing countries,
the discerning role of governments in the urbanization process has
resulted in a consistent bias giving favored cities and regions a cost
advantage (Henderson, 2010).
Consumption cities are often deficient in creating
agglomeration externalities and bringing positive effects on job
creation and productive investments (Jedwab, 2012). These
disadvantages can lead to surges of income inequality in urban
centers (World Bank, 2013), rampant youth unemployment
(African Development Bank, 2011), and over-strained public
services and social discontent (UN-Habitat, 2014). This is
reflected partly by the fact that 55% of urban residents in Africa
are living in slums1 coupled with high and rising levels of youth
unemployment (World Bank, 2013). Urban development
programs in Ethiopia share most of the problems found in other
African urban centers.
1
Source: http://www.data.worldbank.org/indicators , retrieved on
25/06/2020.
95
Ethiopia is the least urbanized country compared to most

African countries, with 21.2% of the people living in urban centers
in 2019, though this is expected to rise to 40% by 2050 (United
Nations, 2019). The current low level of urbanization puts Ethiopia
in a unique position to promote inclusive growth and guide its
urbanization process in a sustainable manner. Most of the existing
urban centers are concentrated at the lower end of the urban
hierarchy (Ermias et al., 2019) which provides an opportunity to
minimize and protect congestion externalities. The country is also
entering to a demographic transition with an increasing youth labor
force (Assefa and Gurum, 2017). With 53.2 million of working-
age group in 20192 expected to reach 91 million by 2037 (CSA,
2013), job creation and growth of productive service and industry
sectors are crucial for Ethiopia to be able to exploit the
demographic dividend and harness development.
Historically, agriculture has been the main driver of
Ethiopia’s economy and it is still the largest employer in 2019 –
with 69% employed in agriculture followed by 21% in services
and 10% in industry3. The Ethiopian government has taken
cognizance of these figures in giving attention to the existing
urbanization process (FDRE, 2016). Monitoring urban expansion
trends has been incorporated in the recent Growth and
Transformation Plan (GTP)-II (2015/16 – 2019/20) which
explicitly recognized the importance of urbanization in enhancing
productivity and unlocking the country’s economic growth
potential. Equally important is that cities need to be managed and
governed effectively and efficiently to promote a sustainable and
2
Source: International Labor Organization, ILOSTAT database.
Retrieved from http://www.data.worldbank.org on August 08, 2019.
3
Source: http://www.data.worldbank.org retrieved on August 08, 2019.
96
conducive environment for living and working (Jusoh and Rashid,

2008).
This chapter explores the urbanization process in Ethiopia
and its relation to development with an emphasis on the urban
economy. An overview of literature on urbanization and
development is provided first and followed by the presentation of
data and empirical models used to examine city-size distribution
and inequality. Existing policies, strategies, and institutions are
examined first before analyzing the dynamics of city-size
inequality. The drivers, trends, and patterns of Ethiopia’s
urbanization are also explored. The relationship between
urbanization and socio-economic developments, particularly the
urban economy, is considered before reflecting on possible policy
implications that help to harness and direct the process of rapid
urbanization process.
3.2. Urbanization and Development: Theoretical

Overview
Urbanization is the process of growth in a country’s urban

population accompanied with an increasing importance of the
cities relative to rural areas across the economic, political, and
cultural aspects. The process comprises aspects of urbanization
itself and urban concentration or the degree of urban resource
concentration in one or two cities (Davis and Henderson, 2003).
Urbanization and development are clearly related but there are
different views over which comes first.
“The first argument is “urbanization is an inevitable
outcome of economic development”. This notion asserts that
industrialization and economic growth generally tends to
attract rural-urban migration. The second view states “no
97
nation in modern history has managed to sustain per capita

income growth without massive transfer of people from land
to the city”. This statement suggests that urbanization causes
economic development. But urban areas are endowed with
better public services and infrastructures compared to rural
areas. These services and infrastructures in turn attract
industries and firms” (Njoh, 2003).
The direct bi-causal relations show that urbanization and

development are positively associated. The conventional wisdom
is that cities do function as powerful engines of national economic
development (World Bank, 2009; UN-Habitat, 2012). If
urbanization leads to growth and development, then this has
profound implications for countries struggling with growing urban
population. But the link between economic growth and
urbanization is nonlinear and may depend on different factors.
One hypothesis indicates spatial concentration promotes
growth most at the early stages of development (Williamson,
1965). When transport and communication infrastructures are
limited and capital markets are non-existent, production efficiency
can be gained by concentrating on space. Later, when the capital
market and availability of infrastructures improves, congestion
externalities may favor dispersed economic activities. This is
consistent with the urbanization and growth model of Bertinelli
and Black (2004). Cities with initial high concentration of
population may become congested and ultimately limit the
efficiency of both consumers and producers. In fact, urban
concentrations initially increase and then decrease as income per
capita increases (Davis and Henderson, 2003). The largest cities
grow slowly while the medium and large sized cities continue to
grow at an increasing rate (World Bank, 2000).
98
A second hypothesis argues that political institutions and

policies may encourage over-concentration (Ades and Gleaser,
1995; Davis and Henderson, 2003). In many countries, national
governments favor capital cities or the seat of the national elites
leading to under-investment in inter-regional transport,
communication, and public services. Favoritism involves
restrictions on capital markets and licensing in favor of firms
interested to invest in national capital, allowing central
government bureaucrats to extract rents without competitions from
lower-level officials in other locations (Henderson, 2003).
Similarly, urban bias theoretics contend that government policies
can systematically channel valuable resources to the capital city
which may result in short-term economic growth (Njoh, 2003) and
disproportionately attract migrants to the capital (Henderson,
2003).
Agglomeration, however, matters more in closed
economies because transactions can be cheaper over shorter
distances (Krugman and Elizondo, 1996). Empirical evidence
shows a negative correlation between openness and urban
concentration though direct causal links are uncertain (Ades and
Glaeser, 1995). Urbanization processes often involve large public
and private investments and are generally associated with
economic development. Hence, the government’s role in the
urbanization process over the years can result in a consistent bias
giving favored cities and regions a cost advantage (Henderson,
2010).
Urbanization is generally considered as crucial for
developing countries to reduce poverty and cities seen as the
primary sources of economic growth in the global south (Glaeser
and Sims, 2015). However, the process and development of
urbanization differ widely. In the context of developed countries,
99
urbanization has a strong positive association with economic

development due to structural transformation and industrialization
(Jedwab, 2011; Henderson et al., 2013). Conversely, many argue
that Africa has been urbanized without economic growth over
some decades (Fay and Opal, 2000; Henderson, 2003) and is
urbanizing without the standard structural transformations
(Jedwab and Vollrath, 2015; Gollin et al., 2016). Consequently,
rapid urban growth is already outpacing the capacity of many local
governments to provide basic services and infrastructures (Zeng et
al., 2016) resulting in traffic congestion, overstrained public
services, slum surges and social discontent (UN-Habitat, 2014).
These problems are more visible in sub-Saharan Africa because
urbanization is happening unplanned (Ravallion et al., 2007;
Elhadary and Samat, 2012) and at much lower level of per capita
GDP growth than has occurred elsewhere (Jedwab et al., 2017).
With rapid urbanization in Africa lacking the required
levels of structural and political transformations (Jedwab et al.,
2017), the result is propagation of urban slums and informal
sectors. This is reflected by the increasing urban poverty (Dorosh
and Thurlow, 2014) and the fact that 55% of urban residents in
sub-Saharan Africa were living in slum settlements in 20144. To
accommodate the rising urban population and increasing land
demand for urban use, cities grow outward encroaching on
farmlands (Cohen, 2004) producing urban sprawl (Ginsburg et al.,
1991) and leading to problems of transport (Yeh, 2002). Other
studies emphasis that urban poverty and youth unemployment are
the major challenges of urban Africa (African Development Bank,
2011) suggesting the urbanization of poverty (Ravallion et al.,
4
Source: http://www.data.worldbank.org/indicators , accessed on
25/06/2020
100
2007) as the rural poor migrate to big cites (Christiaensen et al.,

2013).
Much of the prior discussions seem to suggest the
possibility of an optimal level of urban concentration to promote
economic growth and/or economic development. Urban primacy
or urban concentration measure helps to indicate the relative
distribution of national urban resources between big and small
cities (Henderson, 2003). Productivity growth is strongly affected
by the degree of urban concentration (Henderson, 2003) and
agglomeration boosts GDP growth up to certain levels of
economic development (Brulhart and Sbergami, 2008).
Nonetheless, the relationship between urban primacy and
productivity is non-linear (Duranton and Puga, 2001; Brulhart and
Sbergami, 2008).
The standard growth models assert that urbanization is
associated with moving out of agriculture and the advance of
productive service and manufacturing sectors. Urbanization is
positively associated with income (Henderson, 2010) and the
world is becoming more urbanized (Gleaser, 2013). The historical
experience of developed countries shows that labor moves out
from agriculture to more productive non-farm sectors as economic
growth increases. This may hold for many Asian countries in their
early urbanization stage. But urbanization in Africa, the second
fastest urbanizing continent (United Nations, 2019), has happened
without economic growth (Fay and Opal, 2000; Henderson, 2003)
which makes quantification of the relationship difficult.
In developing countries context, national government
policies such development strategies and political ideologies have
a role in controlling resources that are motivated to direct
urbanization (Henderson, 2010) and urban primacy is directly
affected by policies and politics (Davis and Henderson, 2003).
101
This is partly explained by the pace of urbanization that happened

in developing countries over 50 years as opposed to pace of
urbanization in developed countries that happened over 100 years
(Jedwab et al., 2016). Urbanization has increased substantially in
many developing countries even with persistent poverty and
inadequate state capacity. This relationship is observed in Sub-
Saharan African countries where changes in income are weakly
correlated or uncorrelated with urbanization (Jedwab and Vollrath,
2015). This suggests that policy and political institutions may be
important drivers of urbanization in Africa.
The rapid growth of cities brings changes in the urban
landscape, shelter, society, environment, economy, governance,
and infrastructure (Singh, 2014). Invariably, rapid urbanization
requires massive local and inter-city investments to replace
traditional institutions and social structures within short time spans
(Henderson, 2010). But most cities in developing countries suffer
from insufficient open spaces and poor infrastructures and
congestion externalities including substantial pollution, pervasive
traffic congestion, and inefficient migration (Bertinelli and Black,
2004). To realize sustainable cities, therefore, it is imperative that
urban development policies should consider the economic,
environmental, and social aspects in a holistic manner.
3.3. Data Sources and Empirical Framework
The previous discussions indicate that the relationship

between urbanization and development depends on the context.
But it is also clear that urbanization is closely associated with the
dynamics of economic development including the causes of
economic growth, the pace of structural transformations, and the
nature of the physical environment in which growth occurs.
102
To understand the relationship between urbanization and

development in Ethiopia, three interrelated areas have been
investigated using datasets from different sources. The first is
examining urban policies, strategies, and institutions in view of
promoting urbanization for development. This was mainly done by
reviewing the documents issued by the Ministry of Urban
Development5, different proclamations enacted for urban
governance both at regional and national level, the GTP-I and
GTP-II and other relevant policy documents. The second issue is
analyzing drivers, patterns, and trends of urbanization and finally
analyzing the association of urbanization with development within
the urban economy.
3.3.1. Data Sources

The 1984 - 2007 census and the 2013 projection data from
CSA, though it lacks regular census data, are appropriate datasets
to examine the evolution and distribution of Ethiopian cities
because they contain disaggregated city-level population data.
City-size classifications of the Ethiopian Ministry of Urban
Development and Construction (MoUDC) were also adopted to
understand the changes and distributions of city-size over time.
The MoUDC (2012) classified urban settlements into five discrete
city-size groups - the smallest is below 20,000 inhabitants and the
largest is with one million and above. The five clusters are: ‘small
towns’ (2,000 to 20,000); ‘medium towns’ (20,001 to 50,000);
5
As the policy and strategy documents indicate, the ministry has gone
through several changes of name. The Ministry of Urban Development
and Construction in 2005, then Ministry of Urban Development, Housing
and Construction and most recently Ministry of Urban Development and
Housing. For simplicity, we used the term Ministry of Urban
Development to represent the different names.
103
‘large towns’ (50,001 to 100,000); ‘cities’ (100,000 to 1,000,000);

and ‘metropolis’ (more than 1,000,000). Characterizing the nature
of urban growth dynamics and processes helps to understand the
level of urban concentration which in turn shows the relative
distribution of national urban resources. The MoUD’s
classification is pertinent to explore city-size evolution in the
urban system.
The CSA population projection data has limitation in
considering the effects of policy interventions implemented after
2013 although these play a profound role in increasing
urbanization. A probable result is low estimates of the urban
population. But a downward bias in urban statistics can be
addressed by constructing an objective and continuous indicator of
urbanization. One approach is to consider the night-time light
(NTL), often applied as alternative reliable marker of urbanization
for many developing countries (Henderson et al., 2003;
Michalopoulos and Papaioannous; 2018) and addresses the
administrative urban-rural boundary rigidities. However, the
satellite resolution that collects NTL time series data changed from
DMSP-OLS Version 4 to VIIRS Version 1 in 2013. The VIIRS
has a superior and higher resolution than the old DMSP-OLS
inhibiting any direct comparison of NTL data before and after
2013. Our analysis extends from 1984 to 2037 which makes it
difficult to apply the NTL data. Another possible mechanism
would be the application of remote sensing data to map
development of urban centers but less flexible for tracking changes
over time and is beyond the scope of this study.
For the sake of consistency, the CSA data was used, while
acknowledging the limitations, to observe urbanization dynamics
over 50 years covering the period from 1984 to 2037. The CSA
(2013) does not have population projections for every urban
104
center. To fill the gap, we calculated the respective regional states’

urban growth rate used in the CSA to compute the population
projection data for each urban center included in its 2007 report.
Here, it is important to note that applying the same growth rate to
all urban centers in the regional state is limited to capture growth
rate differentials arising from agglomeration economies. For the
years succeeding the 2007 census, analysis of urban systems
evolution and city-size distributions is limited to the urban areas
included in the 2007 census. Urban centers created after 2007 are
excluded from the analysis by default.
Timeseries data was compiled from the World Bank
database to investigate relationships between urbanization and
structural transformations. The database has comprehensive macro
development indicators from which we extracted annual data since
1990 for macro indicators such as sector contribution to GDP,
sector employment proportion to total employment, and
percentage of urban population. This data was used to examine
whether urbanization was accompanied with the required
structural transformation of the economy.
Another focus of this chapter is to investigate the trends in
urban labour market as urbanization proceeds. The CSA Urban
Employment Unemployment Surveys (UEUS) data was used to
examine the dynamics of urban labor market. The UEUS has been
conducted annually to collect annual data from the urban centers
since 2003. The dataset draws employment samples from all urban
centers up to 2006 and after 2006 only cities with threshold of
100,000 inhabitants were considered for the survey. We chose this
dataset to provide data that enabled us to rigorously evaluate
employment trends and wage distributions limiting our analysis to
adults of 18 years and above though the surveys collect data from
the age of 10.
105
The monthly payment and weekly working hours were

extracted from the UEUS dataset to explore distribution of wage
across time and space. The corresponding consumer price indexes
(CPI) from CSA were also used to account for the spatial
differences in cost of living. The earning variable is wage per hour,
which was calculated by dividing cost of living adjusted to
monthly payment using weekly working hours6. This is a good
proxy for an hourly wage assuming all workers work for same
number of hours every week (Baum-Snow and Pavan, 2013; Chen
et al., 2017). Studies indicate that wage inequalities are
disproportionately located in the larger cities (Juhn et al, 1993;
Baum-Snow and Pavan, 2013). City level data is limited in the
dataset and generally in Ethiopia which should be considered in
the future. Despite this, we expect the reginal states with more
large cities to exhibit higher wage inequalities.
The UEUS has clear identification of the regional states
which helped in decomposing wage distribution by regional states.
Gini coefficients was used to decompose wage inequality. We
acknowledge that our results are coarse since the drivers of wage
inequality may differ between larger and smaller cities within the
regional state.
3.3.2. Empirical Framework

There are often two types of dynamics in the evolution of
urban systems. The first issue is at macro level and characterizes
evolution of city-size distributions which in turn helps to
understand the level of urban concentration. The second is at micro
level that examines the dynamics of individual cities and variations
6
This is because neither monthly working hours nor weekly payments
are available in the dataset.
106
of city population over short time intervals. The urban primacy, or

urban concentration, measure indicates the relative distribution of
the national urban resources between large and small cities
(Henderson, 2003).
The three methods often applied to measure urban
concentration are Hirschman-Herfindal index, Pareto Parameter,
and Urban Primacy. The Hirschman-Herfindal index of
concentration is computed as the sum of the squares of each city’s
proportion of the national urban population (Henderson, 2000).
The Pareto Parameter, also known as Zipf’s law or rank-size rule,
indicates how fast city-size decreases as one moves from the
largest to the smallest in size distribution (Rosen and Resnick,
1980). The third option is Urban Primacy which is measured as the
share of the largest city population to the national urban population
(Ades and Glaeser, 1995). Applying the Pareto Parameter to
characterize the evolution of city-size distribution has two
advantages. It helps in the analysis of urban concentration while
also enabling the observation of the evenness of city-size
distribution. It also has the flexibility to use sub-samples, which is
important when regular censuses are absent as is the case for this
study.
The Zipf’s law or rank-size rule is often applied to explore
the evolution of city-size distribution and provides simple
descriptions of the urban system hierarchy. The law is associated
with stages of urbanization and is used to inform policymakers as
they make decisions on investment in and management of urban
infrastructures. Studying the rank-size distribution of Ethiopian
cities can also contribute to testing the empirical regularity of the
Zipf’s law. The rank-size rule begins with ranking the cities by
population size in descending order, with the largest city numbered
1 and the smallest city rank equal to the total number of cities, to
107
obtain rank 𝑅(𝑚) for city-size 𝑚. Zipf’s law states that the
distribution of cities should follow a Pareto distribution, with
𝑅(𝑚) = 𝐴𝑚−𝛼 . Many studies apply the following log-linear
model to test rank-size rule for city 𝑖 at time 𝑡
ln𝑅(𝑚𝑖𝑡 ) = ln𝐴𝑡 − 𝛼𝑡 ln 𝑚𝑖𝑡 + 𝜀𝑖𝑡 (1)
where 𝛼𝑡 is the Pareto coefficient. The rank-size rule holds when

𝛼𝑡 = 1, which means 𝑅(𝑚𝑖 ) ∗ 𝑚𝑖 has the same value for every
city. This means the second largest city has about half of the size
of the largest, the third largest city has one third of the population
of the largest and so on. When the coefficient is greater than 1, the
cities are evenly distributed or the size difference between small
and large cities is minor; 𝛼𝑡 < 1 indicates that the cities are more
unequal.
The estimate of 𝛼𝑡 , the Zipf’s value, is often sensitive to
sample selection where estimates tend to be larger when studies
consider the upper tail distribution of city-size (Black and
Henderson, 1999). The Zipf’s value sensitivity to minimum cut-
off of city-size suggests the rank-size relationship in equation (1)
is different from log-linear. To test the sensitivity and examine the
non-linear relationship of rank-size, equation (1) is usually
reformulated by adding the quadratic term of population and is
given as:
ln𝑅(𝑚𝑖𝑡 ) = ln𝐴𝑡 − 𝛼𝑡 ln 𝑚𝑖𝑡 + 𝛽𝑡 (ln 𝑚𝑖𝑡 )2 + 𝜀𝑖𝑡 (2)
The rank variable is only valid for each individual year

because the number of urban centers in the sample vary every year.
Hence, repeated cross-section regression is applied to estimate
both equation (1) and equation (2). The Pareto distribution of city-
108
size is estimated for each year using census data of 1984, 1994 and
2007 and the projection data of the years 2017 and 2021.
3.4. Policies, Strategies, and Institutions of

Urbanization in Ethiopia
Albeit low level of urbanization at the present, Ethiopia is

the fastest urbanizing country in sub-Saharan Africa, and this trend
is expected to continue in the coming decades (United Nations,
2019). The fast urban growth that started from a low base provides
a unique opportunity to proactively manage and regulate urban
development programs to ensure inclusive growth and
opportunities. However, it appears the functional linkages between
big cities and small urban centers are weak since each city mostly
performs similar activities. The government’s primary concern is,
therefore, to manage urbanization to harness opportunities and
capitalize on the complex forces of urbanization to create resilient
and dynamic urban economy.
The Ethiopian government is fully aware of the
importance of cities in economic growth. This was noted by the
National Urban Policy issued in 2005, the first initiative that
recognized urban perspectives in the overall national development
(FDRE, 2005). The national policy was developed to interlink
urban centers and make them globally competitive by ensuring
efficient service delivery and improving suitability for living. The
policy document includes a set of principles, namely,
strengthening of rural to urban and urban to urban linkages;
ensuring balanced development of urban centers; reducing urban
poverty; increasing community participation in urban
development; creating partnership with private sector; and creating
decentralized urban governance. These principles also encompass
109
issues of poverty reduction, job creation, equity, and governance

of the cities.
In addition to the urban policy document, urban plan
regulations have been issued asserting the need to regulate and
guide urban centers, Proc No. 574/2008 (FDRE, 2008). Different
urban strategies and urban development implementation packages
have also been issued to deal with housing supply, land
development and management, integrated infrastructure supply,
plan preparation and implementation, governance, environmental
resilience, and recently, in 2018, urban regeneration and
expansion. These strategies have outlined a series of ambitious
objectives, though the institutions required to implement them are
usually missing or not equipped with the right level of human and
financial capacity. This phenomenon is demonstrated by the wide
gap between urban policy and functional realities. For instance,
most big urban centers, including Addis Ababa, are exposed to:
serious environmental problems (UN-Habitat, 2017), an
increasing number of slum dwellers (UN-Habitat, 2016), frequent
power outages (Abdisa, 2018), and inequality in accessing primary
health care (Woldemicael et al., 2019).
The current urban institutional structures emanate from
the decentralized system of the 1995 Constitution. The
Constitution empowers reginal states to establish lower-level
administrations and provide them with adequate power and
responsibility to mobilize citizens for regional and local
developments. Accordingly, many regional governments endorsed
the Urban Local Government Proclamations to provide a legal
basis for their cities (Gebre-Egziabher and Yemeru, 2019).
The Ministry of Urban Development and Construction
(MoUDC) is the lead institution responsible for urban
development initiatives and for preparing sector plans including
110
aligning urban issues with PASDEP (2005-2010) and GTP

programs. The urban focused plans of GTPII identified strategic
growth sectors and infrastructures to enable the country to achieve
the MDGs and reach lower middle-income status by 2025. But the
GDP per capita of Ethiopia was only US$857 in 2019, far below
the Sub-Saharan Africa average, excluding high income countries,
of US$1573 GDP per capita.
Urban centers are expected to provide services and
logistics that enable connection to international markets, boost
industrial development and export activities, and facilitate the
success of GTP II and beyond. However, the current highly
unequal urban system – with Addis Ababa 11 times larger than the
second largest city in 2013 (MoUDHC, 2015) and being the
location for about 64% of Ethiopian firms (Oqubay, 2019) – can
do little to provide efficient services and infrastructures that create
healthy urban market systems. The government is promoting
proactive national development plans to moderate the current
unbalanced urban system and facilitate the development of a
modern industrial economy. The government has also been
implementing different initiatives such as creating growth poles,
development corridors and city clusters (MoUDHC, 2015) to
achieve a balanced development and urban growth.
The regional states cascade the MoUHDC plans and
programs while preparing their local plans to generate resources
for cities and implement programs. Many partners work in urban
development initiatives including the World Bank, GIZ, Cities
Alliance, UNDP, UNIDO and DIFID. The programs and projects
mainly focus on poverty reduction, creating employment
opportunities, access to basic services, capacity building on urban
governance, and providing decentralized service delivery.
Proactive planning is crucial to ensure the long-term effects of
111
interventions in terms of providing cost efficient, effective,

environmentally friendly, and sustainable services. However, it is
questionable whether the current institutional systems can enable
effective delivery of services and programs to meet these
challenges given the constraints in capacity and resources of urban
centers. In the face of rapid urbanization, however, providing
effective and efficient public goods and services is becoming
increasingly difficult.
The extent to which the regional states can nurture urban
development and facilitate mitigation of urban challenges is
uncertain. Like the capital city Addis Ababa, the regional capital
cities are likely to suffer from overcrowding; often leading to
significant proportion of their population living in informal
housing units with limited access to basic services including water
and electricity. The rise of slums and overcrowding in the absence
of large-scale industrialization leads to proliferation of informal
sectors which are difficult to monitor and/or regulate.
Furthermore, the inability to tax the informal sectors diminishes
the local government’s revenue and in turn limits its capacity to
finance public services.
3.5. Drivers, Trends and Patterns of Urbanization in

Ethiopia
Ethiopia is the second most populous country in Africa, with

a total population of 112 million and a 2.4% growth rate in 2019
(United Nations, 2019). Although modern urbanization started in
the nineteenth century (Pankhurst, 1985), Ethiopia’s level of
urbanization was only 21.2% in 2019. Nonetheless, the annual
urban growth rate of 4.5% is faster than Sub-Saharan Africa
112
average of 4% (World Bank, 2014) and expected to continue at

faster rate of 5.4% (World Bank, 2015).
The urban population increased from 4.5 million in 1984
to 11.86 million in 2007 (CSA, 2007) and about 42.4 million
people are expected to live in urban areas by 2037 (CSA, 2013).
The main drivers of this rapid urbanization include natural growth,
rural to urban migration and reclassification of rural settlements.
Prior to 2018, natural growth was the highest contributor (40%) to
the growth of the urban population followed by rural-urban
migration (33%) and reclassification of rural villages to urban
centers (24%) (World Bank Group, 2015). Rural to urban
migration, however, is expected to outpace the natural growth for
two reasons (see Chapter 4 regarding population dynamics in
Ethiopia). The first reason is restrictions that were imposed on
rural land redistribution as part of the economic reforms in the
1990s. These restrictions limit access to farmland for the
increasing youth population, generating landless farm households,
which in turn accelerates rural to urban migration decisions.
Migration to mega-projects of irrigation and sugar processing
plants is also expected to provide a significant boost to the creation
of new urban centers. This is reflected by the fact that the
proportion of urban residents who migrated from rural to urban
increased from 25% in 1996 to 33% in 2013 (MoUDC, 2014) and
expected to reach 47% by 2037 (World Bank Group, 2015).
The emerging rapid urbanization can bring inclusive
opportunities and benefits if managed properly. Decision makers
and urban planners alike are looking for different scenarios.
Debates on whether city-size matters to reduce poverty and
generate employment have continued (World Bank, 2016). Since
large and small cities grow differently due to the agglomeration
externalities affecting evolution of city-size distribution, the
113
government needs to design specific city-size or cluster-based

policy and intervention modalities. Hence, understanding city-size
distribution has an important contribution to policy discourse in
terms of poverty reduction and creating inclusive opportunities.
This argument presumes the notion of city-sizes and their
industrial compositions which arises from aspects of urban
hierarchy (Black and Henderson, 1999). However, before
examining the recent trends of urbanization in Ethiopia, we need
to present how Ethiopia defines urban areas.
3.5.1. Measuring Urbanization

The Central Statistics Authority (CSA) uses a flexible
approach, of either political status or presence of urban services
and activities, to define a locality as urban area (CSA,2004)7. But
it uses the term town (locally known as Ketema) for all urban
settlements and has no criteria to group the urban centers into
clusters, for example using population size. This makes it
problematic to understand the level of socio-economic activity or
to develop criteria for allocation of resources. Another concern is
the bureaucratic procedures associated with drawing boundaries as
the urban centres expand into rural areas around their periphery.
The practice is for local governments to agree and report the
changes of urban boundary to their respective council (FDRE,
2008) and then disclose these changes for public consideration.
7
CSA (2004) considers a locality as urban area if it satisfies either of the
following criteria: i) all Regional, Zonal and wereda capitals which serve
as administrative centers; ii) all localities with urban dwellers’
associations (kebele) not included in (i); and iii) all localities not included
in (i) and (ii) but with 2000 or more inhabitants primarily engaged in non-
agricultural activities.
114
This procedure often results in delays and can even bring the
required adjustments to a halt.
Studies concerned with issues of urban Ethiopia often face
predicaments in finding comprehensive and coherent measure of
urban population. In addition to the poor data system of the CSA,
difficulties can arise from the frequent changes in the delimitations
of urban areas and the naming of previously enumerated urban
centers. In some instances, the CSA also acknowledges a
settlement as urban for political reasons even though the
population may be below 2000, a minimum threshold under
normal situations. This definition is also problematic as small
towns can be easily reclassified as rural following changes in
economic or political factors. For instance, many urban centers
enumerated in the 1994 census were not included in the 2007
census even though total urban population and the number of urban
centers had increased tremendously.
The CSA uses binary urban rural administrative
classifications which do not recognize peri-urbanization and the
dynamics of peri-urban areas. This likely under counts Ethiopia’s
urban statistics and brings measurement challenges. With the rapid
urban growth since early 2000s, new construction and urban
sprawl are the main feature of all urban centers including Addis
Ababa. Although these are the most striking features of Ethiopia’s
spatial development (Dadi et al., 2016), tracing urban development
is difficult in the absence of a regular census. While
acknowledging these limitations, we have carried out the simpler
task of observing urbanization dynamics over the period of 1984
to 2037 using the CSA data on census and population projections.
Using the CSA data, a considerable increase in the number
of urban centers has been observed. The urban centers have
expanded substantially both in surface areas and number of
115
inhabitants. The number of cities with population of more than

20,000 has risen from 22 in 1984 to 85 in 2007 and expected to
reach over 440 by 2037 (Table 3.1). A caveat is that the CSA
urban population projection data often depends on pre-existing
demographic factors which may not capture the effects of
industrial parks and other development interventions after 2013.
It is important to note that the data for the years 2017 to
2037 is based on CSA (2013) projections. This may be limited in
reflecting the effects of the GTPII policies, mainly the
establishment of Economic Zones and Industrial Parks as well as
the continuous displacement of settlements due to social unrests in
many parts of the Oromia, SNNP and Somali regional states after
the 2015 election.
3.5.2. Urban Systems 1984-2021

The Ethiopian urban system has changed significantly in
city-size and distribution over the last 37 years. During the 1984-
2021 period, the total population increased by 158%, from 39.4 to
103 million. This was accompanied by rapid urbanization with the
urban population increasing by 414% from 4.45 to 22.88 million.
There was, however, a significant change in 1991 in both
administrative and economic systems. The economic system
changed from a communist to a market-led economy while the
administrative systems transformed from unitary to federal
system. As a result, the urban evolution and ecosystem are
different before and after 1991.
The evolution of city-size clusters is presented in Table
3.1. In 1984, there were 22 cities with the threshold of 20,000
inhabitants. This increased to 85 cities in 2007 (nearly four-fold
increase in 23 years); and it is expected to reach 442 in 2037. Since
1991, Ethiopia has followed a decentralized federal administration
116
system consisting of nine regional states and two city

administrations (FDRE, 1995). Furthermore, as part of the
unconditional right of self-determination in the 1995 Constitution, the
Sidama Regional Sate was established in 2020 creating the tenth
regional state. The decentralized government system resulted in rapid
economic growth accompanied with significant expansion and
formation of urban units across the country. The number of urban
centers with a threshold of 20,000 inhabitants had immensely
increased by 218% between 1994 and 2017. The regional states’
capitals are the fastest growing cities likely benefiting from
infrastructures of the political and administrative units.
Table 3.1: Evolution of city-size group by year, 1984-2037

City-size 1984 1994 2007 2017* 2027* 2037*
group (1) (2) (3) (4) (5) (6)
Metropolis 1 1 1 1 1 1
Cities 0 3 10 21 38 65
Large Towns 10 9 13 29 55 89
Medium towns 11 38 61 108 190 287
Small towns 799 871 912
Total urban
821 921 997
centers
Percentage Change
(2)-(1) (3)-(2) (4)-(3) (5)-(4) (6)-(5)
Metropolis 0 0 0 0
Cities 233.3 110.0 81.0 71.1
Large Towns -10.0 44.4 123.1 89.7 61.8
Medium 245.5 60.5 77.0 75.9 51.1
towns
Small towns 638.1 4.7
Source: author computation based on CSA (1984, 1994, 2007, 2013).
Note: * indicates projection data based on CSA (2013).
117
The Ethiopian urban system can be grouped into three

levels using administrative hierarchy. The highest status is a city
administration followed by cities with the status of a zone, most of
which were provincial capitals during the unitary system prior to
1991, and the lowest level is cities with wereda (district) status.
There are also two charter cities, Addis Ababa and Dire Dawa,
with the status of city administration and directly accountable to
the Prime Minister. Cities with the status of a zone are often the
capitals of regional states and benefit from being the center of
administrative and commercial infrastructures of the regional
government. Cities with status of zone and wereda are
administered by their respective regional states.
3.5.3. Urban Growth and City-Size Distribution between 1984

and 2021
The introduction of economic reforms and the change
from a command to a market-led economy in 1991 can be used as
a base for comparative analysis of the urbanization and urban
growth of Ethiopia. Evolution of the urban population is presented
in Table 3.2. In the pre-reform period, in 1984, the urban
population was 4.45 million. Of the total urban population, 32%
were living in Addis Ababa and about 22% in the largest 22 towns
with threshold of 20,000 inhabitants. In the post-reform period, the
urban population increased to 11.84 million by 2007 with annual
growth rate of 4.8% due to natural growth and rural to urban
migration. Concurrent to this trend, the number of urban centers
with threshold of 20,000 inhabitants increased to 85, with about
three small towns being transformed to medium-size towns
annually.
By the end of 2007, about 40% of the total urban
population were dispersed in 912 small towns with a size of less
118
than 20,000 residents. The rest of the population was distributed in

85 cities with an average of 84,100 inhabitants (Addis Ababa
included) or 51,900 inhabitants (Addis Ababa excluded). Addis
Ababa comprised 38% of the 85 cities’ total population and was at
the top of the urban hierarchy.
In 2021, based on the CSA (2013) projection, the total
urban population is expected to reach 22.88 million in 200 cities
with the threshold of 20,000 inhabitants. In both pre- and post-
reform periods, Addis Ababa was the only urban center with
millions of inhabitants and remained firmly at the top of the urban
hierarchy. It will continue to do so until 2037 and probably
beyond. Addis Ababa is 11 times larger than the second largest city
in 2014 (MoUDHC, 2015). The excessive primacy causes an
overstretched provision of public services and make the city
deficient to serve the labor market. This is partly exhibited by the
fact that residents seeking employment and services are caught up
by a weak public transport system, congested traffic, poor sewer
systems and waste disposal management.
However, many private investors have preferred to invest
in or around Addis Ababa due to the relatively better quality of
service and infrastructure. In fact, about 64% of the firms in
Ethiopia are based in and around Addis Ababa (Oqubay, 2019)
suggesting the political favoritism has been giving Addis Ababa a
cost advantage. This suggests that Addis Ababa will certainly
continue to dominate the other urban centers and be the hub of
economic and political decisions of the country for the foreseeable
future. Strong metropolitan primacy in many cases is the spatial
equivalent of inequality of power, wealth, and status.
Using the MoUDC (2012) city-size classification, urban
areas are categorized into five groups. In terms of urban population
distribution, there were 799 small towns comprising 46% of the
119
total urban population and one metropolis representing 32% of the

total urban population in 1984. In 2007, there were 912 small
towns accommodating 40% of the urban population and the
number of medium and large city-size groups reached 74 from 21
in 1984, comprising 23% of the urban population. These results
show a significant change in city-size distribution.
Comparison of the pre- and post- 1991 periods reveal
distinct urban evolution trends. In both periods, people living in
small towns dominated the urban population. The smallest city-
size group increased rapidly with 5.14 new settlements entering
the urban system annually, a process that led to an increase in the
number of dwellers in small towns. The number of medium size
towns also increased rapidly with 8.2% annual growth. Cities were
created after 1991 and expected to increase in the foreseeable
future – there were 10 cities with more than 100,000 inhabitants in
2007 but none in 1984. The creation of cities can be attributed to
the growth of pre-existing medium and large sized towns due to
natural growth and the incorporation of peri-urban/suburban
districts into the respective towns.
In the EPRDF government period (after 1991), Ethiopia
has been recording rapid economic growth rate of 10% and urban
growth of 4.8%. Compared to the base year 1984, urban population
and urban units have been growing continuously. This urban
growth is attributed to both intensive and extensive changes in the
urban population. The extensive margin is arising from increases
in the number of urban administrative units while the intensive
margin referring to increases in number of people living within the
administrative units.
120
Table 3.2: Evolution of urban population and projected rates,

1984-2037
Population(million) Percentage change
1984 1994 2007 2017
(8)-(7) (9)-(8) (10)-(9)
(7) (8) (9) *
Metrop 1.423 2.084 2.740 (10)
3.435 46.47 31.42 25.38
olis
Cities 0.413 1.657 4.150 300.95 150.45
Large 0.681 0.716 0.923 2.084 5.13 28.96 125.65
towns
Mediu 0.310 1.082 1.831 3.169 248.38 69.24 73.08
m
Small 2.039 3.089 4.708 51.51 52.41
towns
towns
1984 1994 2007 2017* 2027* 2037*
Urbanization rate (%) 11.17 13.81 16.67 20.4 25.4 31.1

Urban Population
4.45 7.38 11.84 19.16 29.31 42.39
(million)
Rural Population
46.09 62.08 76.3 86.64 94.40
(million)
Source: Author computation based on CSA (1984, 1994, 2007, 2013).
Note: * indicates projection data based on CSA (2013).
Between 1984 and 2007, the number of urban

administrative units increased substantially from 821 to 997.
During this period, not only the number of urban centers but also
the number of residents in pre-existing urban centers increased
tremendously. Compared to the base year 1984, the number of
cities in all the size group levels, except metropolis, increased as
the population of pre-existing cities grew. The medium and large
size towns expanded the most and ascended to respective higher
city-size groups. All the large towns in 1984 transformed to cities
by 2007 and all the medium towns as well as few small towns in
1984 upgraded to large towns in 2007.
121
The city-size distribution shapes evolution of urban

systems. Understanding city-size distribution also helps to
characterize the nature of urban growth dynamics and processes
(Xu and Zhu, 2009). The analysis shows that most medium-size
towns are in Oromia and Amhara and many more are expected to
be created in Oromia, followed by the Amhara, SNNP and Tigray
regional states (Figure 3.1). Figure 3.1(a) shows that urban centers
in Oromia have been the fastest growing cities compared to the
other regional states. Among the emerging regional states, almost
all medium-sized towns were in Somali region until the 2007 but
after 2007, Afar regional state outpaces the Somali region (Figure
3.1(b)).
In both pre- and post- 1991 periods, the increase in the
number of towns and the expansion of towns/cities are the main
sources of urban growth. The growth of the average city-size might
be due to changes in local knowledge accumulation, technology or
accentuating the scale of externalities of cities (Black and
Henderson, 1999). But studies indicate that the urban system in
Ethiopia has been increasingly subject to political systems and
policy issues (Ermias et al., 2019). The current federal
administration system grants fiscal decentralization and political
autonomy to regional states. This likely gives regional cities the
opportunity to expand and compete with the primary city (Ades
and Gleaser, 1995).
The establishment of industrial parks, universities and the
construction of stadiums are among the core economic activities
implemented based on political decisions. It is, therefore, of
interest to scrutinize if specific types of cities grow more rapidly
than others. In other words, it is important to examine whether
similar shocks affect cities differently and to measure the urban
concentration index.
122
Figure 3.1: City-size by Regional States, 1984-2037

(a) Big Regional States
120
100
80
60
40
20
0
Medium
Medium
Medium
Medium
Large
Large
Large
Large
City
City
City
City
1984 1994 2007 2017 2022 2027 2032 2037
Amhara Oromia SSNP Tigray
(b)Emerging Regional States

12
10
8
6
4
2
0
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Large
Large
Large
City
Large
Large
Large
Large
Large
City
City
City
City
City
City
City
1984 1994 2007 2017 2022 2027 2032 2037
Afar Benshangul-gumuz Somali Gambella
Source: Author based on CSA data
123
3.5.4. Urban Primacy or Urban Concentration

The rapid urban growth in Ethiopia has been accompanied
with continuous new construction and urban sprawl. It is,
therefore, important to examine the dynamics of urban
concentration to understand city-size distribution8 evolution over
time. We examined the evolution of city-size distribution over time
using parametric estimation methods. Estimation results of the
Pareto distribution, equation (1), of Ethiopian cities for the years
1984, 1994 and 2007 and projection data of 2017 and 2021 are
presented in Table 3.3. The top panel of Table 3.3 column (a)
presents estimates for a full sample of both census years 1994 and
2007, except for 1984 as data is not available for some cities. The
estimation results show that Pareto estimate is less than 1 but
showing an increasing trend over time. The results suggest that the
urban centers were unequal indicating the presence of urban
concentration. The increasing trend of the Zipf’s value over time
indicates the city distribution is evolving from less even to more
even meaning differences in city-sizes was declining. This might
be because small and medium city- sizes grow faster than the
largest cities, that supports the results in Table 3.2.
To test sample selection sensitivity of 𝛼𝑡 or the Zipf’s
value, we consider a sample of cities with a minimum cut-off
20,000 inhabitants. Most of the cities in this group are either
regional state capitals or have relatively long history of human and
8
The issue of urban concentration is related to urban primacy measure
but not necessarily mean measuring optimal city-size. Optimal city-size
is better examined using individual city data that includes the local
industrial-service composition and effective level of technology (Au and
Henderson, 2002).
124
economic agglomerations9. The regional capital cities have

received a relatively more favorable policies in term of economic
or urban development including establishment of universities. As
a result, the regional capitals have grown from cities with average
size ranging from 30 to 70 thousand inhabitants to more than 200
thousand inhabitants. Consequently, we would expect size
distribution of the sub-sample to be more equal compared to the
whole sample.
We re-estimated the rank-size relationship using sample
of cities with a threshold of 20,000 inhabitants and results are
presented in Part II, column (a) of Table 3.3. The results show 𝛼𝑡
estimates get larger over time starting with less than 1 in 1984 and
exceeding 1 in 2021. For this group of cities, the rise in 𝛼𝑡 shows
a declining trend of urban concentration over time suggesting a
typical evolution of Zipf’s law. The evolution of city-size
distribution in cities with the status of zone and wereda becomes
uniform over time and shows comparatively stable city-size
distribution.
9
Most of the cities were awraja capitals before 1991, subsequently have
become zonal capitals or cities with the status of wereda.
125
Table 3.3: Estimation of rank-size parameters

Part I: full sample
(a)Rank size equation (b)Quadratic rank size equation
Year Obs 𝜶𝒕 𝑹𝟐 𝜶𝒕 𝜷𝒕 𝑹𝟐
1994 921 -0.797 0.892 1.010 -0.110 0.972
(0.00914) (0.0356) (0.00215)
2007 997 -0.889 0.913 1.091 -0.111 0.969
(0.00908) (0.0499) (0.00278)
2017* 997 -0.889 0.916 1.372 -0.120 0.974
(0.00907) (0.0506) (0.00266)
2021* 997 -0.894 0.914 1.519 -0.125 0.977
(0.00909) (0.0493) (0.00255)
126
Part II: Sample of cities with a threshold of 20000

(a)Rank-size equation (b) Quadratic rank-size equation
𝟐
Obs 𝜶𝒕 𝑹 𝜶𝒕 𝜷𝒕 𝑹𝟐
1984 21 -0.822 0.836 -4.760 0.166 0.919
(0.081) (0.873) (0.0367)
1994 51 -1.049 0.91 -4.710 0.158 0.974
(0.0467) (0.331) (0.0142)
2007 85 -1.144 0.956 -3.806 0.115 0.984
(0.0267) (0.22) (0.00948)
2017* 159 -1.214 0.981 -2.615 0.0611 0.987
(0.0135) (0.166) (0.00721)
2021* 204 -1.223 0.987 -2.131 0.0397 0.990
(0.00975) (0.136) (0.00593)
Note: standard errors in parentheses.
* indicates estimated city size based on CSA (2013) projections where the projection data do not include new urban
centers created after 2007 by default.
127
The fact that the Pareto coefficient gets larger when we

limit the sample to a minimum cut-off of 20,000 inhabitant
suggests that the rank-size relationship in equation (1) is different
from log-linear. As observed in Figure 3.2, which plots the log of
city rank against the log of city population, the rank-size
relationship is not linear rather the quadratic relationship is
evident. Estimation results of the quadratic relationship (equation
2) are presented in column (b) of Table 3.3. The results confirm
the non-linearity of the rank size relationships. When we use full
sample and sub-sample for the estimations, the value of 𝛽𝑡 changes
from negative to positive. The positive values correspond to the
downward concavity of the plots in Figure 3.2 suggesting an
increasing concentration of the urban population in the largest
cities. This indicates the emergence of unbalanced urban systems
in the regional states which might be attributed to the
establishment of industrial parks and public universities.
Figure 3.2: Plot of rank-size distribution by years
Source: Author based on CSA data 1984, 1994, 2007 and 2013.
128
In the next section, we look at the mobility of cities

between different size groups using Markov transition matrix.
3.5.5. City-Size Mobility

Drawing from Dobkins and Ioannides (2000), we assume
that the city distribution will evolve according to a homogenous
first order Markov process. This implies every city will occupy
each cell in the distribution at some point. We use the MoUDC
(2012) city-size group classification to put the cities into five
discrete cells at a point in time. This procedure helps to understand
the mobility of cities from one cluster to the other1. We applied
transition probabilities to understand the change of cities in size
group and to test whether the relative size distribution of cities
remained stable over time. We excluded the 1984 data due to
incompleteness. We present the maximum likelihood estimates of
the transition probabilities, 𝑃𝑚𝑛 , which represents the total number
of cities moving from cell 𝑚 to 𝑛 over the years divided by the
total number of cities starting in cell 𝑚 in the year (Table 3.4).
The transition matrix has special features where
probabilities only in the diagonals and immediately off-diagonal
are important. Cities often move up or down one cell between the
years. The results show that values in the diagonal, probabilities of
staying in the starting state, are much higher compared to the
values in other cells. The probability of moving to a bigger size
group up to state 1 is very high. However, moving to the smaller
city-size is negligible – moving from state 4 to state 5 is about one
percent – indicating deurbanization is not happening. The highest
1
It is important to note that the gap between the census and projection is
not uniform, it ranges from 10 to 13 years. We excluded 1984 due to
incomplete data, and 2021 because of the short time scale.
129
probability (40%) is observed in city mobility from state 3 to state

2 indicating formations of more cities with thresholds of 100
thousand inhabitants. The values in cells below the diagonals are
larger compared to upper cells. This pattern is driven by the
presence of ongoing entrants’ push, creating chain reaction as
some cities push themselves to the next higher size level. The
results suggest that almost all urban centers are expanding over
time. This supports the rapid urbanization rates discussed in
previous sections.
Table 3.4: Change of city-size group over the years (1994, 2007
and 2017)
Passage Size Group
1 2 3 4 5
1 100 0 0 0 0
Starting Size 2 0 100 0 0 0
Group 3 0 39.6 60.3 0 0
4 0 2
0 8
28.2 70.7 0.98
5 0 0 90 3
6.82 93.1
Note: 1 is the largest size group and 5 is the smallest size group. 8
3.6. Associations of Urbanization with Ethiopia’s

Urban Economy
3.6.1. Urbanization and Economic Growth Links
Over the last four decades, real GDP per capita of Ethiopia
has increased from 228 USD in 1981 to 600 USD in 2019 while
the level of urbanization increased from 10.6% to 21.2%2. These
figures are consistent with recent studies that show urbanization
2
Source: http://www.data.worldbank.org/indicators
130
rates are positively associated with per capita income (Dorosh and
Thurlow, 2014; Henderson, 2010) and lead to more diversified
income portfolios (Mezgebo and Poter, 2019). Furthermore,
urbanization also motivates farmers to invest in farm technologies
in response to the growth of urban markets, leading to the
generation of higher return (Vandercasteelen et al., 2018), which
in turn enables farmers to join the middle-income group (Diao et
al., 2019).
Models of urbanization and economic growth argue that
technological progress leads reallocation of resources from
agriculture to non-agricultural activities (see Henderson and
Wang, 2005; Henderson et al., 2013). Consistent with this theory
is that the contribution of agriculture to GDP in Ethiopia has
declined as urbanization increased (Figure 3.3). In Figure 3.3,
urbanization is measured by the share of population living in areas
officially classified as urban by the government. It is also clear that
Ethiopia departs from the conventionally established relationship
between urbanization and structural transformations in important
ways. The manufacturing sub-sector contribution to GDP has
remained persistently very small, between 3% to 6% over the last
30 years, far below the figures for sub-Saharan Africa of 16% to
11%3 in the same period. The observed relationship between
urbanization and structural transformation indicates that
urbanization in Ethiopia has been limited to generate incentives for
capital accumulation and technological transformations.
In addition, the service sector has overtaken the historical
dominance of the agriculture sector in terms of its contribution to
the GDP though agriculture remains the highest employer. In
2019, about 69% of the total employment was engaged in the
3
Source: http://www.data.worldbank.org/indicators
131
agriculture sector followed by services 21% and industry 10% (see

also Chapter 5). The low level of employment in industry sector
concurs with Jedwab’s (2012) notion of urbanization resulting
from the rise of consumption cities. This is often referred to as
urbanization without structural transformation (Jedwab and
Vollrath, 2015; Gollin et al., 2016).
Against the background of continuing rapid urbanization,
the low level of industrialization and an increasing service sector
might be the result of food imports instead of domestic production
(Dorosh and Thurlow, 2014) as well as the weak participation of
the private sector in manufacturing (Gebreyesus, 2019). This
suggests that Ethiopian cities are consumption cities financed by
surpluses generated from the agriculture sector and have limited
agglomeration effect and lower impact on long-term job creation.
The limited role in long-term welfare improvements then emanates
from lack of the required environment for the industrial sector to
play its role in innovation and capital accumulation (Gebre-
Egziabher and Yemeru, 2019).
It is safe, therefore, to conclude that the rapid urbanization
of Ethiopia is accompanied with slow structural transformations.
This is also reflected in recent pieces of evidence demonstrating
that urban expansion in Ethiopia may not be improving household
welfare (Dorosh and Thurlow, 2014; Mezgebo, 2017), is limited
in generating inclusive opportunities to all affected (Broussard and
Teklesellasie, 2012; Mezgebo, 2014), and is exacerbating
economic inequality within the society (Abay et al, 2020).
Furthermore, economic growth has been observed while
agricultural productivity has remained steadily low (Barret et al.,
2017). This indicates that the agricultural sector is low in terms of
the level of technological improvement and has become weaker
overtime to absorb productive labor. Low productivity of
132
agriculture in turn accelerates youth rural to urban migration

decisions. In the context of increasing population and scarcity of
agricultural land, which is the case in Ethiopia, youth
unemployment and migration are eminent. For example, rural to
urban migration increased from 26% in 2005 to 31% in 2013 (see
Chapter 4). The release of labor from the agriculture sector,
therefore, is unlikely to be attracted by the technological
advancement in the manufacturing sub-sector.
Figure 3. 3: Distribution of urbanization, employment and

sectors contribution to GDP, 1990-2020
Source: Author’s elaboration based on World Bank development

indicators data
133
3.6.2. Urban Employment and Inequality Trends

The previous section shows that Ethiopia’s urbanization
process lacks structural transformations. In 2019, according to the
statistics of the International Labor Organizations (ILO),
Ethiopia’s urban economy employed one third of the total
employed population. But when urbanization happens without
industrialization, it leads to expansion of the urban informal
(traditional) sector (Yuki, 2007)4.
Between 2003 and 2018, the urbanization level of Ethiopia
rose from 15.31% to 20.76%, showing a 5% raise. During this
period, total employment in the urban economy of the surveyed
urban areas has slightly increased until 2009 but remained constant
afterwards (Figure 3.4). This suggests that job creation in the urban
economy has been stagnant since 2009 while the labor force has
been increasing due to the increasing population. Figure 3.4 also
demonstrates that the informal sector is the main employer of the
labor force though its dominance has declined over time from 90%
in 2003 to 60% in 2018. This large share also implies that many
immigrants to urban areas may not attain noticeable improvement
in their economic situations. Rural migrants do not necessarily
enjoy the benefits of the formal sector because rural migrants are
less skilled compared to urban residents.
The good news is that the formal sector, expected to
provide better incentives and job security, is expanding by 2%
annually. It seems that urbanization is associated with an increase
in job creation in the formal sector, though the state of urban
unemployment remains a serious concern. It is also expected that
4
Yuki (2007) explains the informal sector often employs unskilled
workers whereas the formal sector employs skilled workers and physical
capital.
134
an additional one million jobs per year will be required until 2035
to reduce unemployment (MoUDHC, 2015). This is a clear
indication that the growth of the formal sector is failing to keep up
with the growth of the urban population.
A major problem in the urban labor market is the persistent
over-representation of female workers in the informal sector.
Despite decreases in the size of the informal sector, the proportion
of women employed in the sector remains very high, with up to
two thirds of those employed in informal employment being
women. Studies also show that average wages in the informal
sector are lower than the formal sector (Yuki, 2007; Temkin,
2009). This, again, signals that the expanding formal sector is
failing to create equal opportunity for men and women. It suggests
that women are being marginalized in the labor market as
urbanization increases. It also characterizes women as unskilled,
forcing them to remain in the informal sector and subjecting them
to substantial inequalities. This outcome has important implication
for policy makers in terms of the effectiveness of the strategies and
programs implemented to empower women over the past two
decades.
135
Figure 3.4: Trends of employment by industry, 2003 – 2018
Industry Employment Employment in the infromal sector

50,000 40,000
Number employed
Number employed
40,000
30,000
30,000
20,000
20,000
10,000
10,000
0 0
2003 2006 2009 2012 2015 2018 2003 2006 2009 2012 2015 2018
Infromal Formal Total Male Female Total
Source: Author based on CSA Urban Employment Unemployment Survey (UEUS) data.
136
The national trends cannot fully explain what is happening

in all cities and regions of a country because the drivers of growth
and inequality can vary in each location. City level analysis is
difficult due to lack of data, a factor that needs to be considered in
the future. But the UEUS has clear identification of the regional
states which helps to decompose wage inequality by state. We use
Gini coefficients to decompose wage inequality, but the estimates
are coarse because the drivers of wage inequality may differ
between bigger and smaller cities within any regional state.
The Gini coefficients of the regional states are shown in
Figure 3.5. The figure demonstrates that the national wage
inequality is mainly driven by Addis Ababa followed by Amhara,
Oromia and SNNP regional states. This trend might be attributed
to the concentration of wage employments that pay a higher
premium in the cities. As noted, Addis Ababa is the primary city
and most cities with thresholds of 100,000 inhabitants are in
Oromia followed by Amhara and SNNP (see Figure 3.1). Formal
wage employment is also higher in Addis Ababa compared to other
cities (World Bank Group, 2016), and this is consistent with the
fact that about 64% of firms are concentrated in and around Addis
Ababa (Oqubay, 2019).
Overall, wage inequality is extremely high which
demonstrates the depth of inequality in urban Ethiopia, quite
consistent with the country’s context. National wage inequality
reached an extreme high Gini index of 0.93 in 2012 and reduced
to 0.62 in 2015 before it increased to 0.8 in 2018. The uncertainties
associated with the 2015 elections might have negatively affected
the confidence of foreign investors and firms which then
contributed to the relatively lower wage inequality at that time. A
similar trend was also observed in Amhara, Oromia and SNNP
regional states. The wage inequality in Tigray, however, has been
137
consistently lower compared to Addis Ababa, Amhara, Oromia

and SNNP. Given Ethiopia’s level of development, these results
are consistent with contemporary literature on city-size and
inequality as well as on inequality at early stage of development.
Figure 3.5: Gini coefficient of wage per hour adjusted for

Regional State CPI, 2003 - 2018
Wage per hour

1
Gini Coefficient
0.5
0
2003 2006 2009 2012 2015 2018
Tigray Afar
Amhara Oromia
Somalie Benishangul-Gumuz
SNNPR Gambela
Source: Author based on CSA UEUS data
3.6.3. Urbanization, Housing and Basic Services

Ethiopia is urbanizing rapidly and remains among the
fastest growing urban populations in the world. In any discussions
of urbanization, a vital consideration is the supply of housing and
associated basic services required to achieve sustainable urban
development. It is therefore important to understand the
investments in urban infrastructure that are geared to harness the
138
opportunities of rapid urbanization. Housing conditions in urban

Ethiopia have improved substantially over time, the proportion of
urban population living in slum areas decreased from 95.5% in
1990 to 74% in 20141. Since then, slum areas might have reduced
further due to the continuing construction of condominium and
urban regeneration programs (MoUDH, 2018). Nevertheless, a
quite significant proportion of the urban population still lives in
slum areas and the number of people living in extreme poverty has
increased (World Bank, 2016).
The rapidly growing urban centers are struggling and
falling short of meeting the increasing demand for housing (World
Bank, 2019). An average of 381,000 new housing units are
required per year to meet the rising housing demand (World Bank
Group, 2015). In addition, the slow pace of redeveloping and
upgrading pre-existing slums exacerbates the shortage of formal
housing. The combined housing demand, due to new construction
and redevelopment, is projected to be about 471,000 housing units
per year until 2035 (World Bank, 2019).
The government’s policy response to meet the increasing
demand for housing has been mass state-build housing program
known as the Integrated Housing Development Plan (IHDP). In
Addis Ababa, the highest beneficiary of IHDP, the building
175,000 units (Keller and Mukudi-Omwami, 2017) resulted in
reducing the proportion of informal houses from 58% in 2006 to
38% in 2016 (Larsen et al., 2019). The private sector, including
households and real estates, has played little role in supplying
formal housing due to limited access to land. Land is owned by the
government and priority has usually been given to government-led
programs such as IHDP.
1
Data source: World Bank, http://www.data.worldbank.org/indicators
139
The shortage of housing in the primary market, mostly due

to the limited supply of urban land, has created a strong demand
for informal housing units. This is demonstrated by the dynamic
rental and secondary markets within the IHDP blocks. Due to
limited access to land for development, the private sector has been
pushed to secondary markets to seek accommodation in the
informal markets. Households are willing to pay over five times
the original price of IHDP units in secondary markets (World
Bank, 2019) and about 58% of the low-cost housing units in Addis
Ababa are rented out (Franklin, 2018). But the fact that many low-
income urban residents cannot afford the IHDP units suggests that
the supply of government housing is unlikely to realize the
intended purposes of providing decent housing for the poor and
serve poor households (MoUDHC, 2014).
Rural to urban migration remains extremely high at about
44.4 % (World Bank, 2019) and the migrants often lack the
resources for formal houses and hence end up in slums as a
temporary, transitory resolution. The local urban governments
often refuse to provide legal housing developments for immigrants
and are reluctant to provide basic services in immigrant
neighborhoods. This situation, combined with substantial shortage
of supply of formal houses, has led to increasing incentives for
secondary markets for housing and land. The natural consequence
of widespread secondary markets is a continuing surge of urban
sprawl and proliferation of squatter settlements in the city
outskirts. This expansion of secondary markets indicates that the
housing market in Ethiopia is lagging when compared to the pace
of urban household formation. This in turn results in inflated
housing costs which disproportionately harm the low-income
groups.
140
Youth migration, in the absence of a vibrant productive

urban sector, is socially and culturally problematic. The youth
migrate to cities while the old remain in the rural hinterland. For
the migrants, urban poverty may be preferable to rural poverty
(Gleaser, 2011) due to the declining nature of rural productivity
(Barret et al., 2017). However, rural migrants are less skilled and
are often engaged in the informal sector (Shami and Majid, 2014)
as daily wage and domestic workers. Rural migrants have been the
hardest hit by the COVID-19 pandemic. Aggravated by effects of
COVID-19, the intensity of homelessness and street children has
become very visible in most cities including Addis Ababa.
However, little is said about the nature of poverty in slums and
homelessness or how to escape from it. Understanding the welfare
consequences of slums and whether households or individuals can
exit the slums provides an insight into the micro-dynamics of
urbanization and its welfare consequences.
Access to improved sanitation and improved water
sources are associated with a broad range of health benefits
including less exposure to bacterial infections and drinking
uncontaminated water. Provision of public services such as
electricity, drinking water, sanitation and health services is
relatively better in urban compared to rural areas –water supply is
91.5% in urban compared to 65.8% in rural (FDRE, 2010). Slums,
however, are usually devoid of such public services. The perceived
transitory nature of slums is often ignored by governments in
developing countries (Beall et al., 2010), which often ignore land
grabbing and fail to provide basic services resulting in unsanitary
living conditions. Many big urban centers, including Addis Ababa,
are exposed to serious environmental problems (UN-Habitat,
2017). The sanitation and environment of areas in and around
cities is suffering from a low level of awareness, implementation,
141
monitoring strategies, as well as weak financial support

(MoUDHC, 2014).
Overall, the social and economic well-being of urban
residents is associated with the provisions of services and
infrastructures which play key roles in facilitating economic
performance. However, Ethiopian cities continue to face
considerable shortages of basic services including drinking water
and frequent power outages, negatively affecting productivity and
competitiveness. Frequent power outages increased firms’ cost of
production by 15% between 2011 and 2015 (Abdisa, 2018). The
number of slum dwellers increased from 8.5 million in 2000 to
13.5 million in 2014 (UN-Habitat, 2016). This suggests the
persistence of weak urban planning systems demonstrated by low
municipal revenues and then by failures to finance and provide the
basic urban services. The limited supply of urban services
including housing and infrastructures in turn increases the
incentives for informal settlements in the urban peripheries.
Despite the major gaps in infrastructure and basic services,
cities continue to expand and serve as the main drivers of
economic growth (see Figure 3.3). The services and industry
sectors contributed about 66% of GDP in 2019. This clearly shows
the untapped potential of cities that could be unleashed through
deliberate planning and effective management of urban systems.
Global experience demonstrates urbanization nurtures

economic and social advancement and improves quality of life for
all. Africa is urbanizing rapidly, but this process differs from the
conventional wisdom of urbanization being associated with
development. This is because of the lack of institutional and social
142
infrastructures that create the required structural transformations

since rapid urbanization demands massive local and inter-city
investments to replace the traditional institutions. Ethiopia is
among the least urbanized and fastest urbanizing countries in sub-
Saharan Africa but also shares most of the problems of African
urban centers. The low level of urbanization puts Ethiopia in a
unique position to promote inclusive growth and harness the
urbanization process. But little is understood about the rapid
urbanization process and its effect on development, particularly on
the urban economy.
This chapter has explored the long-term urbanization
process in Ethiopia and its association with structural
transformations and the urban economy. In doing so, existing
policies, strategies and institutions have been assessed and
pertinent data was extracted from different data bases. Over 50
years, 1984 - 2037, of urbanization patterns and trends were
examined using CSA data while acknowledging its limitations.
Census data and the projected populations of each urban area
included in the 2007 census were used. The World Bank’s 1990-
2019 annual data was also used to explore the relationship between
urbanization and structural transformations. The dynamics of the
urban labour market was examined using the CSA Urban
Employment and Unemployment Survey of 2003- 2018.
Our findings show that the rapid urban growth is
associated with excessive urban primacy but not supported with
the required economic and social structural transformations.
Agriculture employs two thirds of the working force, with services
employing of 21% and industry employing the remaining 10%.
However, the service sector is the highest contributor to GDP,
overtaking the historical dominance of agriculture. This results in
the expansion of the urban informal sector and extreme wage
143
inequality. The extreme wage inequality emphases the depth of

inequality in urban Ethiopia. Women workers are
disproportionately represented in the informal economy and are
being marginalized from the benefits of urbanization.
The rapidly expanding urban centers are unable to meet
the growing demand for housing – about 471,000 housing units are
required annually. The serious shortage of formal urban housing
results in unplanned urban expansion and proliferation of
secondary markets for urban land and housing. The results also
show that urban areas are facing shortage of infrastructures and
shortage of housing. The findings concur with the MoUDH (2016)
report highlighting that urban centers were suffering from deficits
in housing, infrastructure, and services; very high unemployment
and inequality; and increasing homelessness. These findings
suggest that most urban areas are expanding because of policy and
political decisions. Government policies could systematically
channel resources to cities and provide indirect incentives for the
rural to urban migration decisions which fuel urban growth. But
the low level of urbanization is an opportunity to change existing
trends and harness the potential of urbanization by giving priority
to strengthening urban planning, increasing research capacity, and
investing in institutional capability.
The urbanization process and development in Ethiopia is
an interesting case study for several important reasons. Urban
centers in Ethiopia are evolving and expanding at much faster pace
than before. Although starting from a low base, this rapid
urbanization requires proactive planning and active management
of functions to unlock the potential and facilitate inclusive
development. Monitoring the current urban expansion would seem
to be a top priority for the government as the institutions in charge
have been publishing a series of strategy documents and
144
proclamations. However, most of the policy documents remain

less effective and inefficient. Making urbanization work for
Ethiopia, therefore, requires addressing a number of key
challenges:
Economic and social constraints: Existing government-
led investments in industrial parks and economic growth corridors
are generating remarkable growth rates in the economy, but
structural transformation remains very slow. The service sector,
not the industry sector, is leading the economy, productivity
increase is not as expected, and the local private sectors crowd-in
has been slow. Rapid urbanization with slow structural
transformations exacerbates the negative externalities including
the poor quality of education and health services, urban poverty,
and weak public transport services for those living in urban areas.
Most cities in Ethiopia have low density but demonstrate urban
sprawl (Gebre-Egziabher and Yemeru, 2019). This leads to
inefficient mobility within the cities and affects costs and rents of
residential and business properties (World Bank, 2019). Properly
planned and managed urbanization plays a crucial role in
eradicating poverty and improving the quality of life by providing
better education and health services, preventing crime and
violence, and improving infrastructures with equitable access to
all, while still recognizing culture, diversity, and safety.
Inadequate urban infrastructure and services:
Development and equitable distribution of services and
infrastructures must take place first to realize the potential of cities.
Well-developed infrastructures create conducive environments to
accelerate economic development. The cities and/or towns of
Ethiopia suffer from poor infrastructure and provision of services
particularly in the lower levels of government offices (Ethiopian
Civil Service University, 2018). Without improved infrastructure
145
and service provision, it is hard to imagine attaining sustainability

or making the urban environment conducive for living and work.
Strengthening local urban governance with the necessary
incentives to municipal finance will improve the quality of urban
settlements. Hence, priority should be given to strengthening
urban local capacity to enable investment and generate finances
for infrastructures and services by involving the private sector. An
improved recognition and engagement with the private sector in
private-public cooperation modalities will enhance planning and
delivery of services.
Inadequate planning and land-use policy: Urban
planning is poor and inadequate, characterized by inefficient land
management and complicated laws and regulations (Gebre-
Egziabher and Yemeru, 2019). Poor urban land management and
supply is demonstrated by weak compliance with land-use and
transport measures,2 the expansion of informal markets for land
and housing, and urban sprawl. This has a direct effect on the
city’s municipal revenue, residents’ cost of living, mobility in the
city, and the values of urban ecosystems and biodiversity. Long
term urban territorial and land-use planning, which considers the
short-term dynamisms of socio-economic developments and
incorporates the modalities of monitoring and evaluating
strategies, is required. For instance, realistic maps that forecast
urban growth for the next 30 years - as suggested by Lamson-Hall
et al. (2019) under the ‘Ethiopia Urban Expansion Initiative’
project -should be prepared.
2
Source: World Bank, Impact of Evaluation of the Transport Sector
Improvement Project in Addis Ababa., project brief document. Accessed
on 12/10/2020.
146
Strengthening data-collection and research capacity:

The rapid urban expansion arises from a complex set of factors
which requires comparable high-quality data, indicators and
advanced analytical skills and knowledge. Quality data and
indicators are essential for effective governance and decision
making. With big quality data, city planners and leaders gain
detailed and updated information of what is happening within their
city. However, the empirical knowledge on urbanization dynamics
and economic functions of cities in Ethiopia is inadequate (Abay
et al, 2020; Gebre-Egziabher and Yemeru, 2019). The existing
main data source for urban Ethiopia, the CSA, has a limited
capacity to provide city level, up-to-date and reliable data and has
weak collaboration with the MoUDH. Comparative analysis and
knowledge sharing can also play a crucial role in providing
responses to emerging challenges associated with sustainable
planning, resilience, and preparedness (UN-Habitat, 2016). Given
the complex nature of urban areas and rapid urbanization, capacity
building in data collection, research and policy analysis should be
given top priority by government authorities.
It is, therefore, safe to generalize that harnessing the
potential of urbanization for development in Ethiopia demands a
coherent approach to address the challenges we have noted above.
This ultimately depends on the effectiveness of policies and
institutions. The approach should recognize that urbanization in its
own right can be harnessed by designing evidence-based policy,
planning, and regulatory frameworks to establish cities that are
productive, resilient, and inclusive.
147
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158
CHAPTER FOUR
Population Dynamics and Rural-Urban

Migration in Ethiopia: Challenges and
Opportunities
Assefa Hailemariam1
1
Fellow of the Ethiopian Academy of Sciences
E-mail: assefahm3@gmail.com
159
4. Population Dynamics and Rural-Urban
Migration in Ethiopia: Challenges and
Opportunities
4.1. Introduction
4.1.1. Background of the Study
Migration is a movement of a person or group of persons
across an international border or within a State away from his/her
habitual place of residence, regardless of the person’s legal status;
whether the movement is voluntary or involuntary; what the causes
for the movement are; or what the length of the stay might be
(Wilson, 1985). It is one of the three components1of population
dynamics. Any change in the number and flow of migrants will
have an effect on the size, growth, and other characteristics of a
population both in the sending and receiving areas. There are two
types of migration, internal and international. Internal migration is
a change of residence within national boundaries, the movement
of a person or group of persons from one geographic area to
another area within a country, crossing administrative boundaries
for permanent or semi-permanent residence (Rees, 2020).
International migration, on the other hand, is the movement of
persons away from their place of usual residence and across an
international border to a country of which they are not nationals
(Wilson, 1985).
Rural-urban migration is a form of internal migration that
refers to the movement of people from the countryside into the
urban areas within the country. Rural-urban migration has been a
major driving force in the urbanization process globally. It played
1
Fertility, mortality and migration are the three factors that bring change
in the size and structure of a country’s population
160
Population Dynamics and Rural-Urban Migration in Ethiopia:…
a major role in the urbanization process of developed countries and

is playing key role in the urbanization of today’s developing
continues (Lall, et al., 2006). In Africa, for instance, migration
from rural areas accounted for at least half of all urban growth
during the 1960s and 1970s and about 25% of urban growth in the
1980s and 1990s (Brockerhoff, 1999).
Today, about 4.4 billion (56.2%) of the world population
are living in urban areas. The urban population is estimated to be
growing at 1.94% per annum, while total population is projected
to be growing at 1%annually. This will result in an urban
population of 5 billion, or 61% of the total world population by
2030 (UN World Urbanization Prospects, 2018). Most of the
growth in urban population will be in developing countries as
developed countries have already been urbanized.
In developed countries, many people prefer to live in the
cleaner and quieter environment of the countryside. Employees
can commute into cities for work because the necessary
requirements, such as public transport or private vehicles, are
easily available; though for people who work in a large urban area
and have to cope with traffic congestion on a daily basis,
commuting between home and work is far from a pleasant
experience (Turcotte and Silka (2008)). Cities in developing
countries, however, still continue to grow rapidly, at a speed two
to five times faster than it was in European countries during the
period of their industrialization (Kojima, 1996). For instance, in
sub-Saharan Africa, urban population was growing at 4%, 2015-
20, and expected to grow at 3.7%, 2025-30, while in Eastern
Africa, the figures were 4.5% for 2015-20 and projected to grow
at 4.2% for 2025-30 (UN World Urbanization Prospects, 2018).
Countries in Eastern Africa in fact are experiencing significantly
161
higher growth rates of urban population than the African average

(UN HABITAT, 2008).
Increasing household size, increasing socio-economic
inequality between people and communities, inequality between
urban and rural areas, increasing unemployment, unequal land
ownership, and the difficulties of rural life in general, and conflict
in particular, have raised livelihood vulnerability in many
developing countries to a level that forces people to consider rural-
urban migration as a survival strategy (Nguyen and Reabe, 2013).
With its share of urban residents only 21.75 of total
population, Ethiopia remains one of the least urbanized countries
in the world. However, it has the fastest growing urban population
in Eastern Africa. Its urban population is growing a little faster
(4.6% in 2015-20) than the rest of the region (4.5%). As urban
fertility is much lower compared to rural fertility, the major
contributing factor to urban population growth and urbanization is
rural to urban migration.
Shortage of farmland and fragmentation of land holdings
has affected smallholder agriculture and made rural livelihood
precarious leading to increasing rural-urban migration (Melesse
and Nachimuthu, 2017) and increasing rural-urban migration has
created increasing challenges for the welfare situation of urban
residents, especially in the provision of housing, employment and
public services. Rural-urban migration also affects livelihoods in
the source (rural) areas (Feleke, 2005). If migrants have no easy
access to urban amenities, as is often the case, this can increase the
cost of living both for the migrant and for the sending household.
Moreover, if the migrants are of a youthful working age, the
elderly who are left behind may not be productive. This can affect
agricultural productivity and rural household income.
162
Harnessing the rural-urban migration for assurance of

sustainable development is essentially linked with population
dynamics (Kounani, 2019). The issues related to population
dynamics are broad and complex. Ongoing demographic changes
influence all of the concerns and objectives at the top of national
development agendas. Better integration of population dynamics
into development planning at national and sub-national levels is
relevant to allow a comprehensive reaction to demographic change
and its implications (UNECE, 2018). They shape and are shaped
by economic development, employment, income distribution,
poverty, and social protection, as well as other issues. They affect
and are affected by access to health, education, housing, sanitation,
water, food and energy; and they influence and are influenced by
the sustainability of cities and rural areas, environmental
conditions and climate change. These migration dynamics, in fact,
have a significant economic, cultural, political and social impact
on the lives of not only the migrants but also those at the place of
destination (Morrissey, 2015)
While Ethiopia is one of the developing countries in
Africa experiencing a high rate of rural-urban migration (UN
HABITAT, 2008)), unlike fertility and mortality, migration, and
more specifically, rural-urban migration is the least researched and
understood component of the country’s population dynamics.
Most previous studies on population attempted to examine the
demographic patterns, trends and main drivers of population
changes in Ethiopia, (Assefa, 2019; Assefa, 2016; Assefa and
Aynalem, 2011; Astede and Marianne, 2016). There are some
other studies that extensively addressed the effect of population
dynamics on the environment in Ethiopia (Abayineh and Simane,
2015; Tegegne, 2014; Selome and Assefa, 2010). Some of these
studies have underlined the increment of movement of people from
163
rural to urban areas (Gibson and Gurmu, 2012; Fassil and

Mohammed, 2017; Fransen and Kuschminder, 2009).
Many studies have indicated that the main reasons for
rural-urban migration include shortage of land, population
pressure, drought and war, and regional inequality of development
(Betemariam and White, 1999). In addition to these factors, urban
amenities such as education, health services, security, better jobs,
and advancement opportunities attract rural people to urban
centers (Birru, 1997; Befekadu, 1978). Feleke, (2005) also
identified better payment, increased construction activity and the
demand for urban domestic workers as among the most important
pull factors. The presence of relatives and friends as well as the
flow of information between origin and destination has been
identified as among the most important factors and key influences
on the pattern of migration (Bjeren 1985; Worku, 1995).
Studies have indicated the consequences of rural-urban
migration on destination. A continued outflow of rural migrants in
quest of basic urban facilities creates pressure on socio-economic
conditions. The job opportunities are insufficient to absorb the
arrival of a large number of people and this puts pressure on
facilities like schools, health and housing (Ralph, 2012 and
Habtamu, 2015). Studies have also shown that migration and
remittances play an important role in supporting rural livelihoods
(Beneberu and Mesfin, 2017; Johnson and Stol 2008; Vathi and
Black 2007), while Grau and Aide (2007) have showed the
negative consequences of the rural youth outflow on the wellbeing
of their family and the local economy.
While these studies have assessed the push-and-pull
factors of rural-urban migration in different parts of the country,
the data they utilized were not nationally representative and the
recent trends, causes, challenges and opportunities were not
164
adequately assessed. Indeed, there have been virtually no specific

national representative studies that addressed the challenges and
opportunities of population change and rural-urban migration in
Ethiopia. This study has, therefore, attempted to assess rural-urban
migration and population dynamics, and the effect on development
in Ethiopia. It has evaluated the causes and consequences of rural-
urban migration as well as push-and-pull factors and emerging
challenges. It has tried to fill the knowledge gaps and to consider
future policy intervention in terms of the effects of rural-urban
migration on future development of the country.
4.1.2. Objectives
The main objective of this study is to explore the causes,
consequences and prospects of rural-urban migration and
population dynamics in Ethiopia. This has involved estimating and
categorizing the effects of rural-urban migration on socio-
economic development indicators; identifying and evaluating the
underlying pull-and-push factors of rural-urban migration in
different social settings; evaluating the effect of population
dynamics on major development indicators; and analyzing the
socio-economic and demographic characteristics of rural-urban
migrants.
4.1.3. Research Questions

The study has attempted to answer the following research
questions: (i) why do people migrate from rural to urban areas in
Ethiopia? (ii) What are the major causes and consequences of
rural-urban migration? (iii) What are the underlying push-pull
factors of rural-urban migration? (iv) What is the extent of rural-
urban migration in Ethiopia? (v) What is the pattern of population
dynamics in Ethiopia? (vi) How does rural-urban migration affect
165
population dynamics of the country in rural and urban areas? (vii)

What are the major resource implications (land and labor) of rural-
urban migration in Ethiopia? (viii) How is socio-economic
development affected by rural—urban migration? & (ix) What are
the possible policy options to optimize rural-urban migration in
Ethiopia?
4.2. Methodology, Research Strategy and Design

4.2.1. Data Sources and Assessment of Data Quality
For this study, both descriptive and inferential statistics
have been employed. After descriptive statistical analyses were
conducted, inferential analysis was used to examine the drivers of
population dynamics and rural-urban migration.
Descriptive statistical methods were employed to examine
the scale, patterns and trends of rural-urban migration and
population dynamics at national and regional level. This method
was also used to analyze the socio-economic and demographic
characteristics of migrants and reasons for migration. In addition,
the descriptive analysis was used to assess the trends in population
dynamics and rural-urban migration, while the multivariate
logistic regression model was used to estimate the drivers of rural-
urban migration and to identify the underlying pull-and-push
factors.
A desk review was applied to triangulate with secondary
data. The data obtained from this source was also used to classify
the effect of population dynamics and rural-urban migration on
socio-economic development of the sending and receiving areas.
The research findings are presented in the form of charts/graphs
and tables.
We used a desk review and an analysis of secondary data.
The desk review was used to assess the achievements, gaps and
166
challenges concerning population dynamics and rural-urban

migration. Relevant literature available in scientific journals,
books, as well as pertinent policy and strategy documents/reports,
were reviewed.
Secondary data from the Ethiopia Population and Housing
Census (1984, 1994, and 2007), CSA Population Projections for
Ethiopia (2013), and the World Population Prospects 2012 of the
United Nations Population Division, were used to examine the
changes in population size and structure. To assess the components
of population change, including fertility and mortality, the
Demographic and Health Surveys (EDHS 2000, EDHS 2005,
EDHS 2011and EDHS 2016) were used. National Surveys, and the
CSA National Labor Force Survey (2005 and 2013) were utilized
to estimate the drivers and trends of rural-urban migration, and;
World Bank data, LSMS 2015/16, was applied to estimate the
correlates of rural-urban migration.
The data obtained from the CSA 2013 population
projection, was population size by age and sex, urban-rural and
region. This information has been used to indicate the trend and
levels of population dynamics but it has its own limitations. The
data offers no information to disaggregate the urban dimension
into small, medium or large town, all of which have different
characteristics. Birth history data obtained from the Demographic
and Health surveys were used to estimate the components of
population change for fertility and mortality. Similarly, CSA data
was used to analyze rural-urban migration. CSA National Labor
Force data provide information on age, sex, education,
employment and other social and economic variables, and were
used to disaggregate migrant with demographic and socio-
economic situations. As this survey employed strong sample
design and included a large sample size it was more valid for the
167
levels and trends of rural urban migration. In addition, the

Ethiopian socio-economic survey data from the World Bank 2015-
16 Living Standard Measurement Survey (LSMS) was used to
assess the correlates of rural-urban migration. This provided
important information including household size, source of
information, sector of information and other population
information.
Secondary data, obtained from the Central Statistical
Agency (CSA), the World Bank and United Nations Population
Division, were coded and prepared for analysis. Socio-
demographic characteristics of migrants, including age, gender,
household size, education, marital status and region of residence,
were analyzed using descriptive statistics. A binary logistic
regression model was fitted to examine the relationship between
the dependent variable and the explanatory variables. The CSA
data and the UN data were used for descriptive analyses (Tables
and Graphs) while the World Bank data was used for multivariate
analysis. For binary responses of no migration versus migration,
binary logistic regression model was used.
Explanatory Variables
In the binary response model, categories in the dependent
variable are discrete. Thus, a logit model is appropriate (Gujarati,
2003; Greene, 2012). The dependent variable, rural to urban
migration, was determined by cross-classifying the migrant’s
current place of residence and area of enumeration. Then the
outcome variable, the dependent variable, was dichotomized in
such a way that rural individuals who did not migrate were used as
a reference category ‘0’ and those who had migrated to an urban
place as category ‘1’. In this specification, the dependent variable
was regressed against independent variables to identify the
168
determinants of rural to urban migration to explain potential push-

or-pull factors.
Although there are a number of socio-economic and
demographic variables that can affect rural–urban migration,
including age, marital status (married, single, divorced, widowed),
land holding size, number of children, and livestock holding, data
information meant we could only include six independent
variables, in the model. These were age, gender, size of household,
source of information, employment sector and major regions in
terms of population size. The choice of the explanatory variables
was guided largely by the previous study by Atsede and Penke
(2016) on the determinants of rural-urban migration in Ethiopia
and the availability of data. The demographic variables age and
sex were introduced to control the objective of individual
characteristics on the decision on migration. To explain the effect
of family on the decision of migration, household size was also
introduced in the model (Deotti and Estruch, 2016). The decision
on where to go and/or how to find work is influenced by the social
network (Deotti and Estruch, 2016), and to measure this dimension
the variable ‘source of information’ was included. In order to see
the main economic activity of the enterprise where the migrant is
working or of a migrant’s own business, the variable ‘sector of
employment’ was included. As a large proportion of rural to urban
migrant happens in four major regions, Tigray, Amhara, Oromia
and SNNP, these regions were included in the model and their
relative contributions estimated. Detailed classification of the
predictor variables is presented in Table 4.1 below.
169
Table 4.1: Categories of explanatory variables

Variables Categories
Male
Sex
Female
<=14
Age 15-29
30+
1-3
Household Size 4-6
7+
Family
Friends/Neighbors
Information provider
Government/Employer
Self
Agriculture
Construction and Manufacturing
Employment Sector
Trade and Services
Education and Other
Tigray
Amhara
Major Regions
Oromia
SNNP
One popular alternative to the odds ratio, when the

dependent variable is binary, is the marginal effect or (partial
effects) of an explanatory variable on the probability that
dependent variable yi equals 1 versus 0 (Williams, 2012). This is
due to a change in an independent variable on the probability that
y =1 is calculated either from the expression for the partial
derivative of the logit function or as the discrete change in the
170
predicted probability when the variable of interest undergoes a

discrete change. In this study, the latter discrete method is used to
compute the marginal effect for a dummy independent variable.
Taking first the derivative approach, the marginal effect of the
probability that y = 1 is:
𝛛𝑬[𝒚¦𝑿] 𝛛𝐏𝐫 [𝐲 =¦𝑿]

= = f (X´β),
𝛛𝐗𝑘 𝛛𝐗𝑘
Where f (X´β) is the density function associated with the Logit

model (standard Logistic).
4.3. Population Dynamics

4.3.1. Introduction
Population dynamics is the study of how and why
populations change in size and structure over time and includes
consideration of rates of reproduction, death and migration as well
as changes in population growth rates, age structures and
distribution of people. It is closely linked to national and global
challenges of development and their solutions (UNFPA, 2012),
and none of our major challenges can be resolved without attention
to population dynamics. Here, we present an overview of
population dynamics, that is, changes in the size, growth and
structure of Ethiopia’s population.
With a population of 100.8 million in 2020, Ethiopia is the
second most populous country in Africa next to Nigeria and the 12th
globally (CSA 2012). It has been experiencing significant
demographic changes since the early 1990s (Assefa, 2019). It has
observed notable declines in mortality and fertility, and a
remarkable increase in life expectancy. Currently, it is undergoing
the process of a demographic transition, a shift from high fertility
and high mortality to low fertility and low mortality settings. This
171
section describes the changes that have taken place in the structure
and composition of the population during the last two decades or so.
4.3.2. Population Size and Growth

Ethiopia population, rural as well as urban has been
increasing rapidly since the 1990s. According to the second
Population and Housing Census in 1994, total population was 53.5
million of which 46.2 million was rural and 7.3 million urban. By
2007, the total population had increased to 73.9 million; the urban
population had risen to 11.9 million and the rural to 62 million.
This was a 38.1% increase in total population and a 63% increase
of the urban population just thirteen years. According to the CSA
median variant projection (CSA, 2013), the population increased
to 94.2 million in 2017, an increase of 20.3 million and was
projected to increase to 136 million in 2037 (Figure 4.1; CSA
2012).
In the early 1990s, the average annual growth rate of the
population was about 3% (TGE, 1993). Since then, however, the
rate has been declining, to 2.9% in the mid-1990s, 2.4% in 2008
and it is currently estimated at 2.3% (Figure 4.2). This still leaves
it among countries with a rapid population growth rate. Indeed, at
the current rate, the population may double in about 30 years.
Equally, population density has also been increasing rapidly, from
66 persons per sq. km in 2000 to 84 in 2020 an increase of 65%,
(3.4% per year on average) in less than two decades)2. As the
country is predominantly rural, with close to 80% of the population
living in rural areas, the increase in population density suggests a
decline in the size of farmland and increasing rural to urban
migration.
2
https://data.worldbank.org/indicator/EN.POP.DNST?locations=ET
172
The urban population is also growing rapidly in

comparison to other East African countries (Assefa and Aynalem,
2011). Ethiopia’s urban population grew at 3.7% between 1994
and 2007, and reached 4.7% in 2017. It then started to decline and
is projected to reach 3.7% in 2037 (CSA, 2013). Nevertheless, the
urban and rural populations continue to increase in size. The
overall urban population increased from 11.9 million in 2007 to 19
million in 2017, and is projected to increase to 31 million in 2030
(CSA, 2013). The proportion of the urban population also
increased from 13.8% in 1994 to 16.1% in 2007 and is expected to
rise to 30.6% in 2037 (Figure 4.2) indicating rapid urbanization.
Ethiopia will, however, remain primarily rural as close to 70% of
its population is projected to be living in rural areas in 2037.
Figure 4.1: Trend in Total Population size and Growth Rate:

2008-2037
3.0 140
Millions
2.5 120
100
2.0
80
1.5
60
1.0
40
0.5 20
- -
1984-1994 1994-2007 2007-2017 2017-2027 2027-2037
Growth Rate Projected Growth Rate
Total Population Projected Population
Source: PHCC (1984, 1994, 2007) CSA (2013)
173
Equally, although the rate of population growth is

declining, as Figure 4.1 shows, the total population will continue
growing in size. This is because of the effect of what is known as
population momentum3.
3
The effect of a large number of women entering childbearing age every
year due to past high fertility and continued growth in the number of
children in spite of declining fertility.
174
Figure 4.2: Urban and Rural Population Size and Growth Rate: 2008-2037
Urban Rural
6.0 35 3.0 100
Millions
5.0 30 2.5 80
25 2.0
4.0
Millions
60
20 1.5
3.0
15 40
1.0
2.0
10 20
0.5
1.0 5
0.0 -
0.0 -
Rural Growth Rate

Urban Growth Rate
Urban Projected Growth Rate Rural Projected Growth Rate
Urban Total Population Rural Total Population
Urban Total Projected Rural Total Projected
Source: CSA (1984, 1994, 2007, 2013)
175
Mortality, fertility and migration are the drivers of change

in a population’s size, structure, and distribution. However, the
significance of these factors varies according to the size of the
units of analysis. For the world as a whole, the annual increase in
population is due to fertility rates that exceed mortality rates. At
the global level, and even for large regional aggregates, migration
is less relevant. However, when the analysis is done at the country
level, migration becomes important, having a big impact on
changes in the population size and structure.
Trends in mortality
In Ethiopia, a considerable decline in infant and child
mortality levels have occurred over the last two decades. Infant and
under-five mortality rates presented in Figures 4.5 and 4.6 show a
pattern of steady decline. At country level, the infant mortality rate
(IMR) declined from 106 deaths per 1000 live births in 2000 to 58 in
2016, and under-five mortality (U5MR) declined from 166 deaths
per 1000 live births in 2000 to 67 in 2016 (Figure 4.3). As Figure 4.3
shows, the decline in IMR and U5MR occurred in both urban and
rural areas. Between 2000 and 2015, urban IMR declined from 97
deaths per 1000 live births to 58; U5MR declined from 149 to 66
deaths per 1000 live births. This shows that during the last 15 years
since 2000, Ethiopia registered significant declines in both infant and
under-five mortality (2.4% and 3.8% per year in IMR and U5MR,
respectively).
176
Figure 4.3: Infant and Under-five Mortality rate
Infant Mortality Rate Under-five Mortality Rate

140
120
115
100 193
80
81 98135
76
60 83114
97 106 62 166 66
40 77 149
67 123 83
66 59 58
54 88
20 67
0
2000 2005 2010 2015 2000 2005 2010 2015
Urban Rural Total urban Rural Total
Source: CSA, CSA and ORC Macro 2000, 2005; CSA and ICF International 2011; 2016
177
However, the decline in IMR and U5MR has not been

uniform across regions. According to the 2016 EDHS, infant
mortality was highest in Afar Region with 81 deaths per 1000 live
births followed by Amhara, Somali regions and the Dire Dawa City
Administration with 67 infant deaths per 1000 live births each,
Gambella with 66, SNNPR with 65 and Oromia with 60 deaths per
1000 live births. The highest U5MR was observed in Afar Region
with 125 deaths per 1000 live births followed by Benishangul-
Gumuz with 96 deaths per 1000 live births, Somali with 94 deaths,
Dire Dawa with 93, Gambella and SNNPR with 88 each, Amhara
Region with 85 and Oromia with 79 deaths per 1000 live births. In
the remaining regions, U5MR ranged between 59 and 72 deaths per
1000 live births (Table 4.2). Addis Ababa City Administration
registered the lowest IMR and U5MR (28 in infant mortality rate
and 39 in under-five mortality rate per 1000 live births).
Table 4.2: Infant and Under-five Mortality by Region: 2000–2016

Infant Mortality Rate Under-five Mortality
Region (IMR) Rate (U5MR)
2000 2005 2011 2016 2000 2005 2011 2016
Afar 129 61 64 81 229 123 127 125
Amhara 112 94 76 67 183 154 108 85
Dire Dawa 106 71 60 67 176 136 97 91
Somali 99 57 71 67 198 93 122 94
SNNPR 113 85 78 65 192 142 116 88
Tigray 104 67 64 63 169 106 85 59
Benishangul
98 84 101 62 198 157 169 94
Gumez
Oromia 116 76 73 60 194 122 112 79
Harari 118 66 64 57 191 103 94 72
Gambella 118 92 76 56 191 156 125 88
Addis Ababa 81 45 40 28 176 72 53 39
Country 97 80 60 48 166 132 88 67
Source: (CSA and ORC Macro (2000; 2005) CAS and ICF (2011; 2016)
178
Figure 4.4: Life expectancy at birth: 1990 – 2020

80
70
67.9 69.8
60 65.5
y 60.6
e 50 55
49.6 50.7
a 40
r 30 61.9 64.1 65.9
52.3 57.6
s 46.6 49.3
20
10
48.1 50.1 53.6 59.7 63.7 66 67.8
0
1990 1995 2000 2005 2010 2015 2020
Male Female Total

Source: UN (2019)
Following the decline in infant and under-five mortality,

Ethiopia also registered significant increases in life expectancy. Life
expectancy at birth increased from about 48 years in 1990 to 67 years
in 2015, with male life expectancy increasing from 46.6 years in
1990 to 66 years in 2015; and female life expectancy from 49 years
to 69 years during the same period (Figure 4.4).
Trends in fertility
The most commonly used indicator to analyze changes in
population size and growth is the total fertility rate (TFR). This
rate is equal to the average number of children that a woman would
have by the end of her reproductive period if she had exhibited the
age-adjusted fertility rates recorded by the population of interest in
a given year. The main feature of fertility in Ethiopia is that it has
been historically at a high level, with overall fertility declining
179
from an average of seven children per woman in the early 1990s

to 4.6 in 2016, a 30% decline, as the country registered a
significant reduction in its fertility rate. Rural fertility declined
from 7.1 children per woman to 5.2, a 26.8% decline, during the
same period. Urban fertility, although much lower than that of
rural fertility, has also been declining from 3.8 children per woman
to 2.3 children per woman (39.5%). during the same period (Figure
4.5). Despite the decline, fertility remains the major contributing
factor for rural population growth.
Figure 4.5: Trend in total fertility by Urban-Rural Ethiopia

(1990-2016)
8
7 7.1
6.6 6.4
6 5.9 6.0
5.4 5.5
5 5.2
4.8 4.6
4 3.8
3.3
3
2.4 2.6
2.3
2
1
1990 NFFS 2000 EDHS 2005 EDHS 2011 EDHS 2016 EDHS
Rural Urban Total

Sources: CSA (1993); CSA and ORC Macro (2000; 2005); CSA and ICF
(2011; 2016).
Ethiopia, in fact, has registered faster fertility decline than

all countries in sub-Saharan Africa combined. Fertility in Ethiopia
was higher than the sub-Saharan Africa average until 2000.
180
Between 2000 and 2005, the TFR in Ethiopia was the same as the
sub-Saharan Africa average but from 2006 onwards, Ethiopia’s
TFR was lower than the sub-Saharan Africa average (Figure 4.6).
Figure 4.6: Total Fertility Rate: Ethiopia and sub-Saharan

Africa
7
5 5.7
5.4
5.1 4.9
4 4.7
3 5.9
5.4
4.8 4.6
2 4.3
0
1995-2000 2001-2005 2006-2010 2011-2015 2016-2020
Ethiopia SSA
Sources: CSA, 1984, 1994, 2007; UN, 2018.
Though fertility has been declining at the country level

during the last two decades, there has been considerable regional
variation. It has declined in seven out of the nine regional
governments (Table 4.3), with the Amhara Region registering the
largest decline in TFR, 37.3% between 2000 and 2016. The SNNPR
had a 22.8% decline followed by Gambella with 22.2%, Tigray with
19%, Benishangul-Gumuz with 18.5% and Oromia with 15.6%
during the same period. Fertility, however, increased in the Afar and
Somali regions. In Somali Region, TFR increased from 5.7 children
per woman in 2000 to 7.2 in 2016 and in Afar from 4.9 to 5.5 during
181
the same period. In Addis Ababa, fertility has been below

replacement level since 2000 with a total fertility rate of 1.9 children
per woman in 2000, falling to 1.4 in 2005. It started to increase in
2011 and reached 1.8 in 2016. In Dire Dawa, total fertility was 3.6
children per woman in 2000 and 2005 but declined to 3.4 in 2011
and 3.1 in 2016. In Harari, it declined from 4.4 children per woman
in 2000 to 4.1 in 2016 (Table 4.3).
Table 4.3:Total fertility rate by region: 2000 – 2016

Region 2000 2005 2011 2016
Somali 5.7 6 7.1 7.2
Afar 4.9 4.9 5 5.5
Oromia 6.4 6.2 5.6 5.4
Tigray 5.8 5.1 4.6 4.7
SNNPR 5.7 5.6 4.9 4.4
Benishangul Gumuz 5.4 5.2 5.2 4.4
Harari 4.4 3.8 3.8 4.1
Amhara 5.9 5.1 4.2 3.7
Gambella 4.5 4 4 3.5
Dire Dawa 3.6 3.6 3.4 3.1
Addis Ababa 1.9 1.4 1.5 1.8
Country level 5.9 5.4 4.8 4.6
Source: CSA & ORC Macro (2000; 2005); CSA and ICF (2011, 2016).
Changing norms and values about children, increasing age

at marriage, greater female participation in education and increased
use of contraception are among the drivers of fertility decline
(Assefa, 2016). At country level, increasing urbanization and
modernization, the changing attitudes to the value of children,
improving girls’ enrolment in primary education and the increase in
182
the proportion of married women using contraception, have all

contributed to reducing fertility1.
The high fertility rates in Somali and Afar regions are
associated with early childbearing and no or little use of
contraception. For instance, as per the 2016 EDHS, the percentage
of teenage women (aged 15-19) who had given birth or were
pregnant with their first child was 23%in Afar and 19%in Somali
in 2016, much higher than the national average of 12.5%. With
regard to the use of modern methods of contraception, Afar and
Somali regions also had the lowest utilization rate, 1% and 12%,
respectively, among currently married women; whereas the
percentage at country level it was 35%. Similarly, these regions
had the lowest level of knowledge of contraceptive methods. The
percentage of married women aged 15-49 who had heard of at least
one modern method was 78.6% in Somali and 89% in Afar,
compared to a national level of at least 97 % percent of married
women reported knowledge of at least one method of modern
family planning (CSA and ICF, 2016).
4.3.3. Age Structure of the Population

The age structure of a population refers to the distribution
of a population by age, either by a single year or age groups. Age
structure is a direct product of past and ongoing demographic
processes and, as such, reflects the development-related factors
that determine mortality, fertility and migration. Broadly speaking,
a total population by age group may be divided into young (age 0–
1
The percentage of the population living in urban areas increased from
11% in 1994 to 16% in 2007. Modern contraceptive use among currently
married women increased from less than 6% in 2000 to 35% in 2016; the
net enrolment of girls in primary school increased from 51% in 2003/04
to 95% in 2016/17.
183
14 years), working (age 15–59 years) and elderly population (age

60 years and above). Due to the interactive effects of fertility and
mortality, the proportions of total population in these age groups
may undergo a transition from a higher (lower) share to a lower
(higher) or declining (increasing) share over a period of time.
According to the experiences of European countries in early 19th
century, the transition takes three phases in the absence of
excessive migration among any of the age groups.
In the first phase, when mortality falls but fertility remains
high, age distribution shifts towards younger ages as the
proportion of children increases owing to the greater number of
infants and children who survive through early childhood. In the
second phase, where fertility begins to decline, the number of
children and youth as a proportion of the total population also
declines. Meanwhile, the proportion of adults at prime age for
work and childbearing in the population begins to rise. During the
third phase, if a lower level of fertility and mortality is maintained
over many decades, the proportion of children (under 15), and
working-age (15-59) as a proportion of the total population, all
decline, while the number and the proportion of older persons
continues to rise.
The Ethiopian population is characterized by a young age
structure with a median age of less than 20 years. This is a feature of
rapidly growing populations. However, it is. Figure 4.7 presents the
distribution of the rural and urban population by broad age groups
based on observed data and projections. It shows the age structure of
the population is undergoing a gradual transition, changing in both
urban and rural areas, though the change in urban areas is faster.
184
Figure 4.7: Age structure of the population of Ethiopia in 2007 and 2037
Source: Prepared by Author using CSA 2013projections
185
The population pyramids presented in Figure 4.7 shows

the age-sex distribution of the estimated and projected urban and
rural populations for the years 2007 through 2037. They display
the percentage of the population in each age cohort and show the
trends of the past and how the population age structure will be
changing in the future.
Indicators measuring the share of the total population in
the three broad age groups (less than 15, 15 to 64 and 65 and over),
the Dependence Ratio (DR) and the Aging Index,1 constitute a first
approach to the study of inter-age relationships seen while the
country is undergoing an age structural transition. Figure 4.7
shows that the population distribution is changing mainly because
of the shift at the extremes. The change in the age structure is
clearly observed in the pyramids with the narrowing of the base
(0-14) and the emerging bulge of the working age population (15-
64) as we move from 2007 to 2037.
Figure 4.7 also shows the difference in the urban and rural
population age structures. The urban pyramids show that the base
is getting narrower and the working age bulging faster than the
rural population. The proportion of the under 15 declined from
45.7% in rural areas in 2007 to 44.3% in 2017; and in the urban areas,
from 44.5% in 2007 to 42.1% in 2017. The projection shows that if
fertility decline continues in both urban and rural areas, the
proportion of under 15 will further decline to 34.3% in urban areas
and to 40.4% in rural areas by 2037. Again, although the proportion
of children under 15 years is declining, while those of working age
(15-59) is increasing in both urban and rural areas, the decline is
1
The Aging Index refers to the number of elders per 100 persons younger
than 15 years old in a specific population. This index increases as the
population ages.
186
faster in urban areas compared to that of rural areas and the increase
in the proportion of working age population in rural areas is slower.
This is mainly due to the large difference in fertility between urban
and rural areas as well as the high rate of youth migration to urban
areas (see Section 3.2).
Figure 4.8: Distribution of total, urban and rural population by

broad age groups (< 15, 15 – 64 and > 65): 2007 – 2037
120
100 3.2 3 3.2 3.1 2.9 3.1 3.6 3.4 3.6 4.7 4.6 4.7
80
51.8 49.4 57.5 55.2 61.9
64.7 66.2 59.6 66
60 68.8 71.6 63.5
40 47.4
45 41.7
39.5 36.8
32.3 30.9 34.5 31.8
20 27.8 29.3
23.8
0
Rural
Rural
Rural
Rural
Urban
Total
Total
Urban
Total
Urban
Total
Urban
2007 2017 2027 2037
<=14 15-64 65+

Source: CSA (2007, 2013)
The working age population on the other hand, increased

from 52.8% in 2007 to 54.7% in 2017 and is expected to increase to
61.8% in 2037 in urban areas and from 51.5% in 2007 to 55.1% in
2037 in rural areas (Figure 4.8). As pointed out above, the gap
between urban and rural areas in the broad age group is mainly due
187
to the differences in fertility and mortality between urban and rural

areas.
The proportion of the elderly will increase by about 1.3% during the
period 2007 to 2037 in urban areas and by 1.2% in rural areas. It is
anticipated that the proportion of children under 15 will continue
declining and the proportion of elderly continue increasing as the
demographic transition accelerates.
Age dependency ratios

The age dependency ratio is the ratio of dependents, people
younger than 15 or older than 64 years of age, to the working-age
population, aged 15-64. The dependency ratio can be disaggregated
into: a youth dependency ratio, the number of children aged 0-14 per
100 persons aged 15-64, and the old-age dependency ratio, the
number of persons aged 65 or over per 100 persons aged 15-64. The
dependency ratio, also referred to as a total dependency ratio, is the
sum of the youth and old-age dependency ratios. The dependency
ratio does not take into account labor force participation rates by age
group. Some portion of the population counted as "working age" may
actually be unemployed or not in the labor force, whereas some
portion of the "dependent" population may be employed and not
necessarily economically dependent.
Table 4.4 presents the total, rural and urban dependency
ratios from 2015 to 2030. It shows that a large proportion of the
population is in the non-working age group. The urban age
dependency ratio is much lower than that of the rural mainly because
of low fertility in urban areas. However, the existing high
dependency ratio continues to pile pressure on the working
population.
188
Table 4.4: Age Dependency and Potential Support Ratios (PSRs2)

2015 2020 2025 2030
Age group
Urban
Urban
Urban
Urban
Rural
Rural
Rural
Rural
Total
Total
Total
Total
< 15 69.9 40.6 78.5 67.1 40.4 76.7 65.6 39.9 76.3 61 38.9 72.2
≥ 65 5.1 3.9 5.4 5.0 3.9 5.4 5.3 3.7 5 5.6 4.6 6.1
Total 75 44.5 83.9 72.1 43.8 82.1 70.9 44.1 81.2 66.6 43.5 78.3
PSR 19.6 25.6 18.5 20.0 25.6 18.5 18.9 27.0 20.0 17.9 21.7 16.4
Source: computed based on CSA (2013)
The youth dependency ratios show a marginal decline for

both urban and rural areas between 2015 and 2030; but the old age
dependency ratio, on the other hand, shows an increase mainly
because of increasing life expectancy, with more and more people
among the elderly expecting to survive longer. However, the
overall dependency ratio is declining and this is expected to
continue. Between 2015 and 2030, it should decline by about 10
points from 75 to 66 dependents per 100 persons of working age.
Evidence shows that falling dependency ratios have contributed
substantially to economic growth in a number of East Asian
countries (Bloom et al., 2003; Higgins and Williamson, 1997).
4.3.4. Implications for Harnessing the Demographic Dividend

Ethiopia has made significant stride in population
dynamics and is in the course of changing its demographic image.
Fertility, infant and under-five mortality are declining; life
2
The number of people age 15-64 per one person age 65 and older.
189
expectancy is increasing, signifying the country is in the middle of

a demographic transition.
However, the first effect if a demographic transition is a
demographic “burden”. As mortality declines, overall population
growth is faster than the growth of the working age population.
Later, as fertility decline continues, the number of working age
adults becomes larger relative to the dependent population, leading
to the opening of the demographic window of opportunity (Ogawa
and Chawla, 2009; Navaneetham and Dharmalingam 2012) and
can act as a major economic spur if an appropriate policy
environment is in place (Bloom, et. al., 2003).
In Ethiopia, from 2000, the working age population has
been growing at a faster rate than that of the total population and
this is expected to continue (Figure 4.9). Thus, a demographic
window of opportunity started to open and will remain open until
about 2050-60. As Figure 4.9 demonstrates, this offers the
opportunity for harvesting the demographic dividend. However,
growth in the working-age population alone is not sufficient for a
country to reap a demographic dividend. The extent to which this
occurs depends on the socio-economic and policy environment.
There must be a demand for an increased supply of labor, and
conditions to enable productivity. These require effective policies
in key areas, including strong health and educational systems to
increase the productivity of potential workers; flexibility and
competitiveness in the labor market to absorb the rapidly
increasing number of young people entering the job market; and
openness to trade to allow growth of productive and rewarding
jobs. Other important preconditions include modern infrastructure
and technology to reduce transactions costs and enable economic
efficiency, good governance, stable macroeconomics, and a sound
190
financial system to promote savings and investment, as well as low

levels of crime and corruption.
Figure 4.9: Growth rate of total population and working age

population
4
3.5
3
2.5
2
1.5
1
0.5
0
1995
1955
1960
1965
1975
1980
1985
1990
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050 Total WAP
Source: UN (2019)
During the last two decades, Ethiopia has not only made
momentous progress in population dynamics but also in other
social and economic sectors. Key development indicators
(education, health and employment) show striking progress
(UNDP, 2014, Ministry of Finance and Economic Development,
2010). Considerable improvement is also being made to develop
infrastructure (road network, communications, power and energy)
as well as markets and financial institutions. However, given that
the demographic dividend is a one-time event and its occurrence
also depends upon effective policies, a lot more has to be
191
accomplished in social as well as economic terms in order to create

a fully favorable environment for harnessing the dividend sooner
rather than later.
In this regard, the fertility decline has not been rapid
enough to boost the demographic transition. While child survival
has greatly improved, the birth rate, though declining, still
remains high, and the pace of decline is slow. The age structure,
is changing, but still broad-based and the dependency ratio stands
at a high level. There is need to accelerate investment in
reproductive health/family planning and maternal and child
health services to accelerate the decline in fertility, reduce the
incidence of illness and promote preventive health care.
The demographic dividend is driven not only by changes
in age structure but also in education which plays a significant role
in accelerating the age structural transition and in overall
development. In this respect, Ethiopia appears to have good
trajectory to enhance productivity and harness the demographic
dividend. Though female participation in education remains lower
than male participation, the number of students enrolled in
primary, secondary and higher education have been steadily
increasing (MoE, 2015/16). Net primary education participation
has increased from 54% in 2002/03 to 94.3% in 2014/15 (MOE,
2019). The net secondary enrollment ratio also increased from
11% to 30.8% between 1999/00 and 2015/16 (MoE, 2019) need
for more investment in education. The quality of education at
secondary and post-secondary levels also needs to be improved
significantly to increase the number of skilled workers able to
adapt to new businesses in a swiftly changing industrial
environment.
In terms of the economy, there is a need to boost
domestic savings, private sector investment and improve the trade
192
logistics. The country has to transform itself from an agriculture

led economy, to an industry-led economy. In order to benefit
from the changing age structure and reap the demographic
dividend, it must focus on accelerating the fertility transition,
expanding the provision of quality technical and vocational
education and developing skills for the increasing number of youth
joining the workforce. There is already a very large number of
unemployed youth.
Ethiopia has made significant stride in population
dynamics and is in the process of a demographic transition. Due to
the decline in fertility, the working age population is increasing
and the dependent age population decreasing. Ethiopia can reap a
demographic dividend3 if policies and investments are properly
tailored to utilize the potential for economic growth and
development and if areas of existing inequality are addressed,
implementing the right policies to ensure empowerment, quality
education and employment. The economic returns could be high.
However, despite achievements at the national level, similar trends
are not consistently reflected at sub-national levels because of the
diversity of culture, ecology, and socio-economic
conditions. There are vast differences in fertility and other health
and education indicators between rural and urban areas and across
regional states. It is important to examine the indicators for the
regional states in terms of fertility, child mortality, and education
to understand where efforts may need to be intensified. Investment
3
This is the economic growth potential that can result from shifts in a
population’s age structure, mainly when the share of the working-age
population (15 to 59) is larger than the non-working-age share of the
population (the under 15 and the 60+). In other words, it is a boost in
economic productivity that occurs when there are growing numbers of
people in the workforce relative to the number of dependents.
193
in health care and education, both at the national and sub national
levels, will be critical in order to accelerate the demographic
transition and to improve Ethiopia’s workforce productivity.
4.4. Rural–Urban Migration
Migration is a human phenomenon and one of the

components of population dynamics which is affected by socio-
economic and demographic changes. It can be international or
internal, within the boundaries of a country, when it has different
forms (“rural to rural”, and “rural to urban”, “urban to urban” and
“urban to rural). This section examines rural to urban migration in
Ethiopia. Based on data from the 2005 and 2013 National Labor
Force Survey (NLFS), (CSA 2005; 2013). The section assesses the
magnitude and trends of rural-urban migration; the characteristics
of migrants, and the pull-and-push factors that force people to
leave their place of origin or attract them towards the place of
destination (Fransen and Kuschminder, 2009). This section also
examines the consequences of rural to urban migration.
Rural-rural migration is the most extensive form of
mobility, 40% in 2005 and 35% in 2013, followed by rural-urban
migration with 26% and 34% of all migrants in 2005 and 2013,
respectively. Urban–urban and urban-rural migration are in third
and fourth place (Figure 4.10). While rural–rural migration
decreased by 17%, rural-urban migration increased by 8% between
2005 and 2013, from 26.1% in 2005 to 34% in 2013–an increase
of 30.3%
194
Figure 4.10: Type and Distribution of Internal Migration in

Ethiopia
2005 2013
20% 25%
23%
40%
14% 18%
26% 34%
Source: Prepared using CSA (2005; 2013)
There is considerable regional variation in the level of

rural-urban migration (Figure 4.11). In both 2005 and 2013, there
were greatest numbers of migrants in Oromia followed by Amhara
and SNNPR. However, the pattern also shows a declining trend,
decreases of 17.2%, 15.0% and 15.2% (2.1%, 1.9% and 1.9%per
year), respectively. Rural to urban migration remained small and
there was little/no change between the two surveys in other
regions.
195
Figure 4.11: Distribution of Rural-Urban Migrants aged fifteen and over, by Region (2005 and 2013)
2005 2013
40 35
35 30
30 25
25 20
20
36 15 29.8
15 22.6
26.6 10 20.2
10 14.2
15.2 5
5 7
9.1
0.6 0.6 1.2 0.3 0.4 8.4 1.6 0 1.8 0.7 1.3 0.6 0.5 1.5
0
Source: CSA, 2005 and 2013
196
4.4.1. Characteristics of Rural–Urban Migrants

Migration is caused by various factors which impinge on
population groups differently. This leads to differentials in
migration with respect to the age, gender or marital status of the
migrants. In order to understand the selectivity of the migration
process, we examined migrants’ demographic and socio-economic
characteristics (age, gender, marital status, education and
employment status). The distribution of migrants according to
these characteristics is presented in Table 4.5.
Age distribution
Age is an important determinant of migration because it is
related to life-cycle changes that influence most humans in almost
all societies. Studies on migration indicate that migration is largely
influenced by a person’s age. Studies on migration differential by
age reveal the impact of migration on socio-economic and
demographic structures at both places of destination and origin
(Weeks, 2008). The age distribution of rural urban migrants in
Ethiopia demonstrates the majority of the migrants were young at
the time of migration. Figure 4.12 shows that the highest
percentage of migrants was observed for those aged 15-29 in both
surveys. The proportion of migrants in this age group was 61% in
2005 and 41% in 2013. The percentage was significantly higher in
both survey years compared to those in other age groups.
The percentage of migrants increased by more than
threefold for those in the age group 30–59 (from 10% in 2005 to
36% in 2013), while for those of 50 and over, it increased from 1%
in 2005 to 9% in 2013. The data shows that for those below 15
years, it decreased by half from its 2005 level in 2013.
197
Figure 4.12: Age Distribution of Migrants (2005 and 2013)
2005 2013
9% 14%
10%1%
28%
36%
41%
61%
< 15 15 – 29 30 – 59 60 + < 15 15 – 29 30 – 59 60 +
CSA (2005; 2013)
The median age at the time of migration was 18 years and

the mean age was 21.3 with a Standard error of 10 in 2005. In 2013,
the median was 19 and the mean was 22 with a SE of 11.4 years.
This shows that the majority of the migrants were very young at
the time of their first migration. They do so mainly in search of
decent work and better living conditions (ILO, 2013). During the
transition to adulthood, young people make important choices
regarding education, labor force participation, and family
formation. According to UNDESA (2016), many youths choose or
are forced to migrate to find decent work, or to escape poverty,
persecution and violence. While migration was highest within the
age group 15-29 years more so, it decreased with age, possibly due
to the higher psychological cost associated with older people.
198
Gender composition of migrants

The gender composition of the migrants presented in
Table 4.5 shows little difference between 2005 and 2013.
However, in 2005, males constituted higher percentage (49.2%
compared to females 48%), while in 2013, this was reversed with
females providing 55.4% of migrants and males 44.6%. This
increase in female migration in 2013 may be due to an increase in
informal sector employment activities such as construction work,
street vending and the like. There is also an increasing number of
young women involved in the retail trade, selling of local drinks,
food, hairdressing, domestic work, and similar jobs in urban areas.
According to Ebisa Deribie (2012), a growing number of women
are migrating to seek economic opportunities in urban areas. Self-
employed migrant women usually have no more than basic or
minimal formal education, are unskilled and possess limited
capital, and as a result, their income in the informal sector is lower
than those working in the formal sector (Todaro and Smith 2003).
Jobs in the informal sector, however, are more accessible for
migrant women and can lead to economic empowerment.
Migrants’ marital status

The marital status of an individual is among the factors
that influence migration, and the distance involved has been found
to be closely associated with marital status, and depends, to some
extent on the migrant’s responsibilities towards the family. Singh,
and Yadava (1981b) reported that married persons usually migrate
shorter distances to allow frequent family visits. Other studies have
also reported that highly educated married migrants are mostly
accompanied by family members, as compared to less educated or
illiterate migrants (Singh and Yadava, 1981a).
199
Table 4.5 shows that in 2005, 61 % of migrants were never

married though in 2013 this had fallen to 28.7%, and the
proportion of married migrants in 2013 was twice that of 2005
(55.1% as against 27.7%). Migrants whose marriage had ended,
through divorce or death, made up 11.2% in 2005 and 16.3%in
2013. The percentages of married and unmarried migrants were
72.3 and 27.7 respectively in 2005, and 45 and 55, respectively in
2013.
Table 4.5: Migrants Demographic and Social Characteristics

Migrant
2005 2013
Characteristics
Gender Number Percent Number Percent
Male 335,606 52 1,468,065 44.6
Female 310,046 48 1,825,482 55.4
Marital Status
Never Married 394,226 61.1 945,330 28.7
Married 178,832 27.7 1,813,988 55.1
Divorce 58,770 9.1 285,000 8.7
Widowed 13,824 2.1 249,228 7.6
Education
No Education 17,739 2.7 232,579 7.1
Primary 408,789 63.3 1,825,573 55.4
Secondary 188,049 29.1 740,265 22.5
Higher 31,075 4.8 495,129 15.0
Migrants’ level of education

Selectivity of migration often varies according to the level of
education of the migrants. Several studies show that migrants are
usually more educated than non-migrants with respect to the place
200
of origin, and less educated than non-migrants with respect to the

place of destination (Singh and Yadava, 1981a and 1981b).
Table 4.5 also presents the distribution of migrants
according to their educational attainment. Almost all migrants had
attained some level of education (97.3% in 2005 and 92.7% in
2013). Of these, 63.3% in 2005 and 55.4% in 2013 had primary
education. The percentages of migrants with secondary education
were 29.1% in 2005 and 22.5% in 2013. More than a third (33.9%
in 2005 and 37.3% in 2013 had attained secondary and higher
education. People with higher level of education migrate to the
cities because there is very little chance of getting a suitable job in
the rural areas. In addition, educated people are less interested in
taking up agriculture as their occupation (Singh and Yadava,
1981a and 1981b) nor is it likely that they could find enough land
to work on in the rural areas.
4.4.2. Urban Destinations of Rural Urban Migrants

Recent rural-urban migration data shows that more than 80% of all
rural urban migrants go to the ten largest cities in the country: Addis
Ababa, Adama. Bahr Dar, Hawassa, Mekele, Gondar, Jimma,
Dire Dawa, Shashemene and Bishoftu, and Addis Ababa is the
destination for the majority. Of all migrants moving to cities
between 2008 and 2013, 39.1%moved to Addis Ababa, followed
by Adama, Bahr Dar and Hawassa receiving 7.4%, 6.8% percent
and 5.8%, respectively. The remaining 19.2% were scattered across
all the remaining urban centers (Figure 4.13).
201
Figure 4.13: Urban Destination of Rural Migrants

45
39.1
40
35
30
25
19.2
20
15
10 7.4 6.8
5.8 5.2
3.7 3.4 3.3 3.1 3
5
0
Source: CSA (2013)
4.4.3. Causes and consequences of rural-urban migration

Causes: The Pull-and-Push Factors
People seldom move from one place to another without
reason. They have justification: usually moving to look for better
opportunities. More specifically, in Ethiopia push factors include
shortage of farmland, recurrent drought, food shortages, famine,
the size of agricultural plots, low productivity, and lack of off-farm
activities. Education and job opportunities, access to services,
better payment and family ties are some of the pull factors for rural
to urban migration (Figure 4.14).
202
Figure 4.14: Push-and-pull Factors of Rural to Urban Migration

in Ethiopia
Source: Adapted from Peter and Larkin (1999) and modified by the
author
In 2005, about 42%of migrants mentioned that education

was the main reason for their move, with nearly 25% searching for
work as a reason for their move. Marriage arrangements provided
a reason for about 6%. These remained the main motives for
migration in 2013 but there was some variation in the pattern.
Moves for education were much less frequent in 2013, having
declined quite significantly from 2005, decreasing by 75 percent,
at a rate of 9%a year. Searching for jobs and marriage arrangement
had increased by nearly 65% percent (8% a year) and 77%p (10%
a year), respectively in 2013. One widely cited push factor, land
shortage, remained unchanged at 2%, suggesting shortage of
farmland is not a major factor in encouraging people to migrate to
urban areas (Figure 4.15).
203
Figure 4.15: Reasons for Migration by Gender (2005 and 2013)

2005 2013
100
100 90
90 80
80
70
70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
Total Male Female Total Male Female

Source: CSA, 2005 and 2013.
204
Gender also provides for differences. In 2005, 71% of

education movers were male and 29% female and in 2013, the
proportion changed to 52% female and 48% male. Similarly, the
percent of migrants due to “search for work” changed across
gender in 2005 and 2013. Consequently in 2005, 56 % were female
and 44% male, and in 2013, 57 % were male and 43% were female.
In both surveys, scarcity of farmland induced more males to leave
their home than females; and a very high proportion, 93% of
female migrants, reported that they moved from their home place
due to marriage related issues.
Consequences of migration
Rural to urban migration is a growing phenomenon in
Ethiopia having a positive and negative development contribution
for both the sending and the receiving areas. It is difficult to do a
cost benefit analysis of rural to urban migration in Ethiopia based
on secondary data. Nonetheless, this section attempts to discuss
the consequences of rural to urban migration based on secondary
data analysis and empirical literature.
Figure 4.16 shows the limits on migrant educational
levels, with the majority having primary level education only. This
suggests migrant skill levels are low and that unskilled migrants,
especially females, are increasingly engaged in labor intensive
economic activities, working as daily laborers, street vendors or
domestic work. (Alemante et al., 2006; Acharya and Cervatus,
2009; McCatty, 2004). Filling a gap in labor demand can be
viewed as a positive factor in rural to urban migration, but it also
has negative consequences. A large proportion of youth migrants
remain jobless, nearly 35% in 2013. Creating jobs for this large
number of youths is a challenge, putting huge pressure on urban
facilities. Moreover, social and economic opportunities seem to
205
mostly favor male migrants rather than female. In 2013, female

migrants were twice likely to be unemployed compared to male
migrants (Figure 4.16). Any effort to circumvent the gender bias
in job and education opportunities will put additional pressure on
urban areas.
Overall, the growing number of people moving into urban
areas puts pressure on the provision of access to education and
employment opportunities in urban settings. Job opportunities are
insufficient to absorb the arrival of large numbers and this affects
basic amenities like schools, health facilities and housing (Ralph,
2012; Habtamu, 2015).
206
Figure 4.16: Migrant Education and Employment status, by Age (2005 and 2013)
80 90
70 80
60 70
50 60
50
40
40
30
30
20 20
10 10
0 0
15-29 30-44 45-59 60+ 15-29 30-44 45-59 60+ 15-29 30-44 45-59 60+ 15-29 30-44 45-59 60+
2005 2013 2005 2013
No Education Primary Secondary Higher Employed Unemployed
207
80
70
60
50
40
30
20
10
0
Total Male Female Total male Female Total Male Female Total male Female
2005 2013 2005 2013

Employed Unemployed
No Education Primary Secondary Higher
Source: CSA, 2005 and 2013.
208
Rural-urban migration can also influence the place of

origin as well. The data on the causes of migration in 2005 and
2013 revealed that nearly 30% and 44%of migrants wanted to
reside in urban areas with the ambition of being employed. To
some extent, they have achieved their aspirations as64%of youth
and 81%of adult migrants were employed in 2013. This implies
they have been able to use earned income to satisfy their need to
support parents and others in the rural areas. Certainly, migration
and remittances play important role in supporting rural livelihoods
(Beneberu and Mesfin, 2017; Johnson and Stol 2008; Vathi and
Black 2007).
There is a downside to rural to urban migration. Since it
is the economically active male populations that are more
migratory, the loss of human capital of rural communities is a
major adverse effect. In rural areas, youth, particularly males, are
usually engaged in labor intensive works to support their families.
When this segment of the working age population leaves their
parents, it has serious consequences on the wellbeing of the family
and can slow-down the local economy (Grau and Aide, 2007).
4.4.4. Correlates of Rural–urban Migration

The results of the multivariate logistic regression model
fitted to estimate the marginal effect of the socio-economic and
demographic variables that are the push-pull factors of rural to
urban migration in Ethiopia are presented in Table 4.6.
The marginal effect estimates1 of the model is presented
in the table. The demographic characteristics of sex age and
household size are the drivers of migration. The probability of
migration among males was 23% and among females 18%. Urban
amenities seem to attract youth and the probability of migration
among the youth is 27%. In addition, the chance of migration
increases with household size. For instance, the probability of
1 All covariates are set at observed values in the sample.
209
migration among rural dweller from a household of size four to

five members is only 19%; it is 27% where the household size is
six or more.
Table 4.6: Results of the Logistic Regression Model
Marginal Effect z P>|z|
Sex
Male 0.23 5.56 0.00*
Female 0.18 4.31 0.00*
Age
<=14 0.07 1.55 0.12
15-29 0.27 6.97 0.00*
30+ 0.09 1.60 0.11
Household Size
1-3 0.16 3.38 0.00*
4-5 0.19 3.24 0.00*
6+ 0.27 4.79 0.00*
Source Information
Family 0.16 4.11 0.00*
Friends/Neighbors 0.19 3.08 0.00*
Government/Employer 0.39 3.37 0.00*
Self 0.22 3.48 0.00*
Employment Sector
Agriculture 0.06 1.57 0.12
Construction and Manufacturing 0.16 2.43 0.02*
Trade and Service 0.25 4.19 0.00*
Education and Health 0.31 4.77 0.00*
Major Regions
Tigray 0.06 1.10 0.27
Amhara 0.36 3.38 0.00*
Oromia 0.40 4.54 0.00*
SNNPR 0.23 3.42 0.00*
Source: Calculated by the Researcher based on the LSMS 2015/16 World Bank data.
210
Socio-economic and cultural factors are also correlated

with rural-urban migration. The probability of rural-urban
migration among those who obtained information from an
employer prior to migration is 39%. Specific sectors appear more
attractive to rural dwellers, with the probability of migration
among those who become employed in trade and service sector
being 25% and the probability of migration in the education and
health sector 31%. Migration and region are also significantly
associated, with the probability of rural-urban migration among
those who live in Oromia, Amhara and SNNPR being 40%, 36%
and 23% respectively.
4.4.5. Challenges faced by urban migrants

Migrants confront many challenges at their destination.
Migrants with little or no formal education or skills find life is not
as anticipated. Challenges ranges from difficulty of finding
accommodation or employment, to mistreatment by employers
and local government officials, the inability to be organized in
associations and obtaining identification cards. One recent study
showed that migrants experienced various forms of mistreatment
including denial of salary, false accusations of theft, gender-based
harassment, and irregular salary payments as well as labor
exploitation, such as being forced to work for long hours with no
overtime payment (Bundervoet 2018). In construction works, most
of the time migrants are forced to work for more than 10 hours
without over-time payments for fear of being fired. Those who sell
goods on the street also experience harassment from the police
including beating and confiscation of their goods/or property.
Bundervoet (2018) also noted that migrants lack access to
government services and support because urban government
officials are reluctant to provide urban ID card for migrants, or
211
allow them to be organized in associations to access finance or a

work place. The result is that migrants face difficulties in moving
freely within an area, opening bank accounts, or joining or forming
associations that would allow them to access loans, find affordable
housing or buy subsidized goods like cooking oil and sugar from
community shops.
4.5. Summary, Conclusions and Recommendations

4.5.1. Summary and Conclusions
The aim of this study was to identify the development
challenges and opportunities of population dynamics and rural-
urban migration in Ethiopia. It covered trends in population
growth, the changes in the age structure and the emerging
demographic opportunities as well as rural-urban migration and
the relevant push-and-pull factors. A desk review of the relevant
literature as well as pertinent policy and strategy
documents/reports, analysis of secondary data obtained from the
2005 and 2013 National Labor Force surveys and data from the
World Bank's Living Standards Measurement Study (LSMS)
2015/16), was followed by analysis of secondary data to
understand trends in population growth and distribution and the
challenges concerning population dynamics and rural-urban
migration. The study explored the causes, drivers, consequences,
and prospects of rural-urban migration and population dynamics
in Ethiopia. Descriptive statistics and multivariate logistic
regression analysis were used in the analysis of data.
The findings show that Ethiopia is one of the developing
countries with a rapidly growing population characterized by a
young age structure. The median age of the population is less than
20 years, but the age structure is changing with a decline in the
under-15-year population and an increase in the working age
212
population in both urban and rural areas. The faster change is

taking place in the urban population. The country’s demographic
window of opportunity is being opened to enable its demographic
dividend.
Overall, rural-urban migration is increasing, though this
varies considerably among regions with the three major regions.
Oromia, Amhara and the SNNPR predominating. These also have
the largest populations. Youth and the unmarried are more
disposed to migrate than the older and married people. Youth
dominated the age groups, and females, the gender composition of
migration particularly in 2013. Married individuals are more
migratory than unmarried and married males more than married
females. Availability of jobs and better employment opportunities
arising from increased construction work and the demand for
domestic workers are some of the key pull factors; shortage of
farmland, population pressure, drought, famine, poverty and
conflict are the main push factors for rural to urban migration. The
largest urban recipient of migrants is Addis Ababa.
Urban opportunities for education and employment favor
male migrants. While migrants’ secondary and higher education
completion rate is very low, a substantial number of migrants have
completed their primary education, including a large proportion of
female migrants. However, more male than female migrants have
completed secondary education and above.
The majority of migrants are employed. However, there is
a gender bias in employment, and more male than female migrants
were employed in 2013.
The major causes of rural to urban migration are
education, search for work and marriage. In 2013, the majority of
rural to urban migrants moved to search for work. Males
213
constituted the largest proportion of these. Many more females

than males migrated due to marriage.
Rural-urban migration has a positive effect on the
destination area, filling the gap in the demand for employees in the
informal sector as most migrants are unskilled. Migration,
however, can also depress social and economic services in the area
of destination. Quite significant numbers of migrants aged 15 to
29 who have not completed secondary or higher education remain
unemployed, particularly female migrants.
This may also be due to shortage of sufficient employment
opportunities in urban areas to absorb the growing labor supply of
working age population. Rural male youth migration may lead to
the shrinking of the labor force in rural areas and negatively affect
the wellbeing of families and depress rural productivity.
Conversely, migrant remittances have a positive contribution to
improve family livelihoods. Families allocate remittances to child
schooling, health and household consumption, which in turn
contributes to the growth of rural economy.
Rural to urban migration is mostly determined by the age
of individual and household size. Prior to migration, migrants can
get information from their social network about where to go and
find jobs, and those who obtained information from potential
employers were more successful in getting jobs. The situation in
Oromia, Amhara and SNNP Regions has a significant effect on
migration as the larger number of migrants come from these
regions.
4.5.2. Recommendations
Based on the study findings, the following recommendations are
proposed:
i. Speed up the Demographic Transition and the age structural
214
change in order to accelerate the opening of the window of

opportunity for harnessing the demographic dividend by
providing more accessible family planning and reproductive
health education and services, especially in rural areas and in
areas with little or no current access;
ii. Put more effort in improving public institutional
transparency, accountability, and reducing corruption.
iii. Increase investments in human capital, especially skill
enhancement, and focus on improving technical capabilities
through the provision of quality education to respond to the
labor supply of an active and growing youth population;
iv. Design and implement macroeconomic policies that inspire
productive investment and increase employment
opportunities;
v. Provide greater access to quality education, skill
enhancement and focus on improving technical capabilities;
vi. Initiate appropriate development interventions to augment
the contributions of rural-urban migration:
vii. Increase access to social services (health and education) in
rural areas to improve the quality of life of the rural
population;
viii. The variations in the scale of rural-urban migration should
be acknowledged and a strategy implemented to maximize
the benefits while reducing the risks of migration. This
should include sensitization of local authorities and law
enforcement bodies to better understand the concept
migration and the reasons behind it;
ix. Develop policies that address the needs of the migrant labor
force in general and migrant women in particular, especially
in education and employment to gain maximum benefits
from their contributions;
215
x. Most migrants are unskilled youth with limited education,

employed in the informal sector. Give access to vocational
and technical training to improve their skills and reach the
greater productivity and economic growth skilled migrant
workers can provide;
xi. Youths migrate from rural to urban areas due to lack land.
There is need to diversify the economic opportunities
available to youth in rural areas by setting up agro-allied
industries in rural areas to provide job opportunities to
ensure youth are integrated into the rural cash economy and
guaranteed a future. Additionally, institutionalize the
remittance system and increase the potential for
development as well as generating savings for poor
households in rural areas;
xii. The scale of rural-urban migration varies according to the
sources of information. Migration needs to be managed
effectively. Establish ICT centers in rural areas, strengthen
local media and information centers, to provide reliable
information and opportunities about destination areas.
Given the risk of exploitation that young migrant women
face in urban areas, especially those engaged in domestic
work, special focus needs to be given to make urban
migration safer for women.
216
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228
CHAPTER FIVE
Multi-dimensional Poverty and Inequality in

Urban Ethiopia
Getachew Yirga Belete1
1
Department of Economics, Bahir Dar University, Ethiopia.
E-mail: getachew.yirga@bdu.edu.et
229
5. Multidimensional Poverty and Inequality in
Urban Ethiopia
5.1. Introduction
Urbanization in developing countries has been viewed by

some development theorists as an integral part of economic
growth, poverty reduction, and distributional change (Ravallion,
Chen, & Sangraula, 2007; Todaro & Smith, 2012). However, the
claims have not been sufficiently supported by empirical evidence
so far. Fast urbanization in developing countries over the past few
decades has served more people worldwide living more in urban
than in rural areas since 2007. In 2020, over 56 percent of the
population in the world lives in cities/towns which are projected to
reach over 68 percent by 2050 (UN, 2018). Countries in sub-
Saharan Africa (SSA) register the highest recent urban growth
rates averaging over 4.2 percent per annum in the last four decades
(1980-2020). Over the same period, Ethiopia’s urban population
has grown by over 4.7 percent per annum, making 21.7 percent of
the total population lives in urban areas in 2020. This is projected
to be almost double to 39.1 percent (or 74.5 million people) by
2050.
Contrary to the expectations, the urbanization of SSA has
rather been correlated with poverty and inequality. For example,
the urban share of the money poor in the region grew steadily from
24.3 to 30.2 percent during 1993-2002 while the urban population
share rose from 29.8 to 35.2 percent (Ravallion et al., 2007).
Showcasing inequality and growth in most cities and towns of SSA
has also been correlated with slum growth as it is evident from the
230
Multidimensional Poverty and Inequality in Urban Ethiopia:…
change in their slum1 household population between 1990 and

2014 by over 115 percent to reach about 201 million (UN-
HABITAT, 2016). Unregulated urban growth, natural population
growth, and rural-urban migration take the blame for the
overstretching rise of urban areas. The capacities of urban areas
are suffering from their limits of providing employment, housing,
basic services (water, health, education, electricity), etc. Owing to
this, urban dwellers may be deprived of multiple welfare indicators
so that poverty and inequality analyses need to pursue a
multidimensional approach. A very recent estimate using surveys
done in 40 SSA countries over 2010–2018 shows that over 29
percent of urban residents live in acute multidimensional poverty,
representing about 86 million of 326.5 million of the 2017 urban
population in the respective countries (UNDP & OPHI, 2019). In
Ethiopia, the same report shows that 37 percent (or about 6 million
in 16 million) of urban dwellers are poor multidimensionally.
Income or expenditure has traditionally been used as a
standard indicator of welfare, aggregated as indices such as FGT
(Foster, Greer, & Thorbecke, 1984) for poverty and Gini
coefficient for inequality. A feature of this unidimensional
approach is that it depends on market prices to compute the
monetary values of the goods consumed. However, the fact that
markets are imperfect in many developing countries, and that
consumption includes public goods whose market prices are
inexistent. The approach, however, has been put under strong
criticism, calling for a systematic inclusion of nonmonetary
dimensions (Tsui, 2002). The multidimensionality of welfare is
1
A slum household is defined as that lacking one or more of the following
conditions: access to improved water, access to improved sanitation,
sufficient living area, durability of housing, secure tenure (UN-
HABITAT, 2016).
231
recognized by the SSF report (Stiglitz, Sen, & Fitoussi, 2009), the
‘Atkinson’ report commissioned by the World Bank (World Bank,
2017), and very importantly by UN’s Human Development Report
through the publication of multidimensional poverty and
inequality indices (UNDP, 2010, 2015, 2019) and its Sustainable
Development Goals (SDGs). A multidimensional approach is
based on a shortfall from a threshold on indicators of someone’s
wellbeing (Bourguignon & Chakravarty, 2003) and summaries can
be computed on a multidimensional poverty index (MPI) (Alkire
& Foster, 2009, 2011) and inequality index (Seth & Alkire, 2014).
Poverty reduction and fair distribution of resources have
been among the core agenda, among others, of the Ethiopian
government for years. This initiative is noted to be reflected in its
policy and strategy documents including Sustainable Development
and Poverty Reduction Program (SDPRP) (MoFED, 2002), Plan
for Accelerated and Sustained Development to End Poverty
(PASDEP) (MoFED, 2006), and Growth and Transformation Plan
(GTP) I and II (MoFED, 2010; NPC, 2016). The other related
efforts made by the government have helped to decline the
proportion of people living in poverty in the last couple of decades.
For example, over the 20-year period spanning 1995/96–2015/16,
the poverty headcount rate fell gradually from 45.5 to 23.5 percent
(NPC, 2017, Table 4.10). In urban areas, the percentage points
drop was slightly high, from 33.2 to 14.8 percent. Other
unidimensional poverty measures (poverty gap and severity
indices) also dropped during the same period.
However, the absolute number of people living in poverty
declined only slightly (from 25.6 to 21.4 million) over the
reference period (1995/96–2015/16) (NPC, 2017, Figure 5.4).
Considering, nonmonetary dimensions, the poverty situation in the
country was even far higher as the percentage of the population in
232
multidimensional poverty was 83.5 percent (or 85.5 million

people) using 2016 survey data (UNDP, 2019). Over half of the
overall multidimensional poverty is contributed by deprivations in
standards of living. Moreover, among all the countries considered
for the global multidimensional poverty index (MPI), Ethiopia has
the biggest difference between incidences of multidimensional
poverty (83.5 percent) and monetary poverty (27.3 percent) based
on the poverty line of $1.90 per person per a day (UNDP & OPHI,
2019). Hence, poverty still is a worrying concern in Ethiopia and
a lot of work awaits ahead to achieve the Sustainable Development
Goal (SDG) number one of which is ending poverty in all its forms
by 2030.
Moreover, inequality in resource distribution has been
rising in Ethiopia over the past years. Official figures show that the
Gini coefficient using the unidimensional (expenditure) approach
increased from 0.29 to 0.33 in the country in general and from
0.34 to 0.38 in urban areas in particular between 1995/96 and
2015/16 (NPC, 2017). Though indicator of monetary inequality
among people in Ethiopia is still lower than other countries in East
Africa (World Bank, 2020, Figure 5.15), the fact that it is getting
higher over time is worrisome. Rising inequality not only
constrains the country’s efforts to meet SDG number 10 of
reducing inequality by 2030 and to maintain economic and social
stability but also does severely undermine the poverty reduction
role of economic growth. Therefore, reducing poverty and
inequality should continue to be on the list of the primary tasks of
the Ethiopian government. This requires, among other things,
timely assessments of the documents and the existing situation
using state-of-the-art methods.
Various recent empirical studies analyze poverty at the
national level in Ethiopia. These include MoFED (2012), PDC
233
(2017), Sender (2019), Shimeles (2019), Woldehanna & Araya

(2019), and World Bank (2010, 2016, 2020). The studies apply the
unidimensional indicators (income or expenditure levels) to
determine welfare status. However, as noted earlier, welfare is
multidimensional that income or expenditure is deficient in
defining one’s experience of poverty. The nonmonetary indicators
such as education, health, housing, clean water, sanitation,
electricity supply, empowerment, employment, personal security,
information, etc. need to be properly considered. The
multidimensional approach to poverty is well suited to analyze
these nonmonetary indicators. Yet, only a few empirical pieces of
evidence are available in Ethiopia at the national level to apply
such a technique (Bersisa & Heshmati, 2016; Goshu, 2019; Seff &
Jolliffe, 2016; Tigre, 2018; World Bank, 2015). For urban
Ethiopia, no recent systematic evidence is available to investigate
poverty in this framework.
With regard to inequality, previous studies in Ethiopia at
the national level (Geda, Shimeles, & Weeks, 2009; Woldehanna
& Araya, 2019) and subnational level (Nebebe & Rao, 2016; Teka,
Woldu, & Fre, 2019) primarily use the unidimensional
(expenditure-based) Gini coefficients. Despite the
multidimensionality of inequality in resource distribution (UNDP,
2015), official inequality estimates are also unidimensional
(MoFED, 2012; NPC, 2017). Some analyze inequality using a
dashboard of monetary and nonmonetary outcomes (Argaw, 2017;
Kedir, 2015). Only a couple of studies attempt to assess
multidimensional inequality at the national level (Goshu, 2019;
Tigre, 2020). In fact, UNDP has recently started reporting
multidimensional inequality indices alongside its MPI for over 100
countries including Ethiopia (UNDP, 2019; UNDP & OPHI,
2019). However, there are virtually no studies that adapt recent
234
developments in multidimensional welfare analyses to the urban

context in Ethiopia. Apart from providing index estimates, these
reports also lack detailed contextual investigations and
disaggregation by population groups and indicators.
Hence, this study seeks to assess multidimensional
poverty and inequality thereby filling the existing evidence gaps
and directing the future needful policy interventions in Ethiopia.
To be more specific, it attempts to answer the following research
questions.
(i) What are the extents of monetary poverty and
inequality at the national and regional levels?
(ii) What are the levels of multidimensional urban poverty
and inequality at the national, regional, and other population group
levels?
(iii) Which are the sources of multidimensional urban
poverty and inequality?
(iv) How are the extents of macro-context and the micro-
level multidimensional urban poverty and inequality linked?
(v) What are the constraints to, and opportunities and
policy options for reducing multidimensional urban poverty and
inequality in Ethiopia?
The study employs available advanced methods in the
unidimensional and multidimensional welfare analysis. It
primarily uses Ethiopia’s LSMS-ISA dataset in addition to data
and information collected from CSA, NPC, NBE, and other
sources. The remaining part of the study is organized as follows.
The next section presents the research methods including the data
type and sources. After results on multidimensional poverty and
inequality are presented and discussed, conclusions and policy
implications lead to the summary of the study.
235
5.2. Research Methods
An important step in multidimensional welfare analysis is

deciding on the choice of dimensions and their indicators. The first
step is to choose dimensions and indicators of poverty and
inequality related to the literature, the SGDs, and the global MPI,
pertaining to be relevant to the Ethiopian urban context. Different
poverty and inequality indices are considered. Once FGT class of
the unidimensional indices of poverty (Foster et al., 1984) and Gini
coefficients for inequality is estimated, they are extended to
indices of multidimensional poverty (Alkire & Foster, 2011) and
inequality (Seth & Alkire, 2014). After the estimates and their
distributions across socioeconomic and regions are presented and
discussed, contributions of those groups and dimensions/indicators
to overall poverty are analyzed. Although the household is used as
a unit of analysis, two of the four dimensions, namely, education
and health, contain individual-level information. An attempt has
been made to link macroeconomy and urbanization. Besides non-
parametric estimates, econometric models are estimated to have an
idea of the correlates of multidimensional poverty and inequality
in urban Ethiopia. In what follows, there is a discussion related to
the identification and aggregation of monetary and
multidimensional poverty and inequality; technical details are
available in the Appendix 2.
5.2.1. Dimensions and Indicators

Twelve indicators are categorized in four dimensions that
can represent the welfare of the household. Some of the indicators
capture access to and utilization of basic infrastructural services
such as education, health, water, sanitation, electricity, housing.
236
Others measure food and non-food poverty as well as access to

information. The fact that children’s deprivations considering
through nutrition and education also helps capture the future
welfare of society. The dimensions, indicators, and their
deprivation cut-offs are chosen based on the literature, SDGs2, and
global MPI. Yet, attempts are made to customize them to the
Ethiopian urban context. Error! Reference source not f
ound.Table 5.1 provides the selected dimensions, indicators,
weights, and deprivation thresholds for constructing
multidimensional poverty and inequality indices.
2
SDG=Sustainable Development Goal. SDG1.2: Reduce at least by half
the proportion of men, women and children of all ages living in poverty
in all its dimensions according to national definitions. SDG2.2: End all
forms of malnutrition. SDG4.1: Ensure that all girls and boys complete
free, equitable and quality primary and secondary education leading to
relevant and effective learning outcomes. SDG4.6: Ensure that all youth
and a substantial proportion of adults, both men and women, achieve
literacy and numeracy. SDG6.1: Achieve universal and equitable access
to safe and affordable drinking water for all. SDG6.2: Achieve access to
adequate and equitable sanitation and hygiene for all and end open
defecation, paying special attention to the needs of women and girls and
those in vulnerable situations. SDG7.1: Ensure universal access to
affordable, reliable and modern energy services. SDG11.1: Ensure access
for all to adequate, safe and affordable housing and basic services and
upgrade slums.
237
Table 5.1: Dimensions, indicators, weights and deprivation cut-offs for multidimensional welfare
Dimension Indicator in
Indicator (weight) Deprivation cut-off
(weight) Global MPI?
Education (1/4) Formal education (1/8)
Any household member has no formal education Yes
(SDG4.6).
Child enrolment (1/8) School-age child not currently attending school Yes
(SDG4.1).
Health (1/4) Child nutrition (1/12) Child (6-83 months-old) is stunted (height-for-age z- Yes
score<-2)(SDG2.2; WHO).
Safe water (1/12) Unsafe source of drinking water (SDG6.1; WHO). Yes
Sanitation (1/12) Unimproved toilet facility (SDG6.2). Yes
Living standards Electricity (1/20) No access to electricity (SDG7.1). Yes
(1/4) Cooking fuel (1/20) No improved cooking fuels (SDG7.1). Yes
Overcrowding (1/20) Over 3 people live per room (SDG11.1; UN- New
Habitat).
Floor (1/20) Floor is natural, non-permanent material Yes
(SDG11.1).
Information (1/20) No TV/ radio/mobile phone/ fixed phone. New
Monetary poverty Food poverty (1/8) Adult per-capita food expenditure is below the New
(1/4) national food poverty line (SDG1.2; NPC).
Non-food poverty Adult per-capita non-food expenditure is below the New
(1/8) national non-food poverty line (SDG1.2; NPC).
Note: WHO=World Health Organization. PDC= Planning and Development Commission. TV=Television.
238
The tool developed by Alkire & Foster (2009, 2011),

implemented by (UNDP, 2010) since 2010 and Alkire & Santos
(2014) for a host of countries and referred to by many as the global
MPI, is a widely accepted framework for multidimensional
poverty analysis. The global MPI primarily uses Demographic and
Health Surveys (DHSs) for its data needs but advises
contextualizing choices of dimensions and indicators according to
the needs. Hence, this chapter first opts for using LSMS rather than
DHS dataset since the former contains income and expenditure
data that DHSs lack. Second, given that housing is one challenge
in many urban settings, it is considered that the number of people
living per room above a certain limit (overcrowding) is one
deprivation that is not available in the global MPI. Third, our
indices contain a monetary poverty dimension. Yet, we keep eight
indicators of the global MPI with a little adjustment of moving
drinking water and sanitation deprivations to the health dimension.
Education is an important indicator of present and future
capability. Two indicators–years of schooling and compulsory
child school enrolment form the education dimension. Whether
any household member has no formal education captures
deprivation in years of schooling while deprivation in child school
enrolment is measured by the presence of any school-age child not
in school. Indicator of school enrolment for children of
compulsory school-age, which is 7 to 17 years in Ethiopia, is
widely used in the literature (Alkire & Santos, 2014; Seff &
Jolliffe, 2016) and it goes in line with the national standards and
SDG targets.
The health dimension is represented by three indicators
capturing lacks in human capital functioning and other health
issues. The first is child nutrition measured in terms of stunting.
Following Seff & Jolliffe (2016) and WHO (2006), two more
239
indicators are employed that are traditionally included in the

standards of living dimension (access to safe drinking water1 and
sanitation) to strengthen the health dimension. Education and
health dimensions represent the extent of access to and utilization
of basic infrastructural services and contain certain elements of
intrahousehold inequality.
The five indicators in the living standards dimension are
similar for all members and capture the household public goods
component of welfare. They primarily measure deprivations in
other basic services including housing, electricity, cooking fuel,
and information. Housing is one of the major problems in urban
Ethiopia where it is noted here as to whether over three people
live per room (Santos & Villatoro, 2018). The quality of the floor
is another housing indicator. The choice of informational assets
over all other assets is also motivated by the literature and applied
to Ethiopian data (Plavgo et al., 2013). Deprivation cut-offs of the
indicators are chiefly taken from SDG targets and the national
ones.
As can be seen from Table 5.1, monetary poverty is
incorporated as a fourth dimension. The monetary dimension may
be considered as capturing both present and future capabilities. It
is composed of two indicators namely, food poverty and non-food
poverty. Consumption aggregates into food and non-food
expenditure as done by the World Bank’s LSMS team are used and
compared with the country’s official absolute poverty lines (NPC,
2017). One challenge of including a monetary indicator is its
possible correlation with nonmonetary indicators which may
1
This is captured by improved water sources defined as consisting of
water piped into a dwelling, water piped into a yard or plot, a public tap
or standpipe, a tube-well or borehole, a protected dug well, a protected
spring, bottled water, or rainwater (WHO, 2006).
240
ultimately affect weights given to them. However, using a similar

dataset used here, Seff & Jolliffe (2016) find that monetary and
multidimensional poverty are not correlated. There is a growing
research favoring the inclusion of a monetary dimension in
multidimensional welfare measurement (Atkinson, 2003; Sen,
1999; Stiglitz et al., 2009). For example, Sen notes that “the role
of income and wealth has to be integrated with a broader and
fuller picture of success and deprivation” (Sen, 1999, p.20).
Recent works have also estimated multidimensional poverty
indices with monetary poverty (Bersisa & Heshmati, 2016; Burchi,
Rippin, & Montenegro, 2018; Goshu, 2019; Rippin, 2016; Santos
& Villatoro, 2018; World Bank, 2018). Bersisa & Heshmati (2016)
and Goshu (2019), in their multidimensional poverty index for
Ethiopia, include a monetary dimension with an indicator taking
1 if the household’s adult per-capita expenditure is below the
national poverty line. World Bank’s first multidimensional poverty
indices for various countries also incorporate a monetary
indicator that the household consumes below the US$1.90 per day
per person line (World Bank, 2018).
5.2.2. Aggregation of Multidimensional Poverty and

Inequality
The study follows the procedures of the AF framework
(Alkire & Foster, 2009, 2011) to identify households as
multidimensionally poor. These tools provide raw (unweighted)
deprivation headcount ratios for each indicator which are
equivalent to the headcount ratio of the FGT family of indices.
Then, attempts are made to compute AF multidimensional poverty
indices and undertake subgroup decomposition. Multidimensional
poverty and inequality among the multidimensionally poor are
also computed based on Seth & Alkire (2014). For the
241
multidimensional analyses, the procedures also provide weighted

deprivation count, censored multidimensional poverty headcount
ratio, the average intensity of deprivations, adjusted
multidimensional poverty index, and a multidimensional
inequality index. Details of the aggregation are available in the
Appendix.
As noted by Sen (1976), a measure of poverty needs to
satisfy three important aspects namely, incidence, intensity, and
inequality. The AF counting approach to poverty based on ordinal
indicators, however, lacks the inequality aspect (Burchi et al.,
2018; Rippin, 2016; Seth & Alkire, 2014). A poverty measure that
is insensitive to inequality does not provide incentives to the
policymaker to prioritize the conditions of the poorest state. In
other words, a measure of inequality is needed in order to
understand whether a poverty alleviation policy has been equitable
across the poor. Although the multidimensional poverty index can
still be decomposable, it is inconclusive regarding the disparity
across socio-demographic subgroups. This study, therefore,
employs the measure suggested by Seth & Alkire (2014). Abeje et
al. (2019) also applied it to Ethiopian data. The traditional Gini
coefficient (𝐺) is also used to measure inequality in monetary
terms (consumption expenditure).
Lastly, to gain an understanding of the significant
correlates of single deprivations, monetary poverty,
multidimensional poverty, and inequality, the available
econometric models are estimated. Such analyses supplement non-
parametric descriptions of the link between extents of macro-
context and micro-level multidimensional urban poverty and
inequality. Besides the analysis help identify constraints,
opportunities, and policy interventions for reducing poverty and
inequality in urban Ethiopia.
242
5.2.3. The Dataset: Ethiopia Socioeconomic Survey

The study primarily uses the urban sub-sample of the
2015/16 wave of Ethiopia Socioeconomic Survey (ESS).
Collected jointly by the World Bank and the Central Statistical
Agency (CSA) as part of the Living Standard Measurement Study-
Integrated Surveys of Agriculture (LSMS-ISA) project, ESS was
initiated in 2011/12 in rural and small towns. It is 2013/14 and
2015/16 waves that include samples from medium and large
towns. ESS uses a stratified, two-stage design where regions of
Ethiopia serve as the strata (CSA & World Bank, 2017). While the
first stage involves a selection of primary sampling units or
enumeration areas (EAs), the second stage entails the selection of
households using simple random sampling. In 2015/16, a total of
4,954 households were interviewed which hosts over 23,393
individuals. A third of them in which this study focuses on were
sampled from urban areas (small, medium, and large towns2). Data
cleaning produces a usable urban sample of 1,625 households (411
or 25% from small towns and 1,214 or 75% from the medium, and
large towns) (Table A 1: in Appendix). As expected, the majority
were drawn from the largest regions of Oromia (21%), Amhara
(18%), and 15% were also sampled from the city of Addis Ababa.
ESS is a multi-topic survey containing individual-,
household- and community-level data on a range of modules.
Individual data on demographics, education, health, expenditures,
and time use are also collected while household data include
expenditure, assets, shocks, non-farm enterprises, credit, and farm
production. Moreover, community-level data on various social
2
CSA’s definition of town size is used: Small town: <10,000 population;
medium town: 10,000-100,000 & big town/city: >100,000 (CSA &
World Bank, 2017). However, ESS does not discriminate between
medium and large.
243
services as well as on prices from local markets are available. Data

for the dimensions of multidimensional poverty and inequality
analysis are extracted from the various modules of ESS.
Although ESS is the principal data source, the study also
used data and information from other sources. For example, data
on urbanization are collected from CSA; information on
microfinance comes from the National Bank of Ethiopia, and
government expenditure and related official statistics are obtained
from the National Planning and Development Commission (NPC).
5.3. Multidimensional Welfare Measures
The study uses some dimensions that should be considered

in measuring welfares. Below are presentations on
multidimensional measuring welfares.
5.3.1. Characteristics of Urban Households

Table 5.2 provides the characteristics of households for
the full urban sample and by town size. Forty one percent of them
are headed by females which is slightly higher in the medium than
they are in large towns (43%). The head’s average age is 42 years
and 37% of them are younger than 35 years but those in medium
and large towns are significantly younger than 35. The average
household size is 3.9 persons.
Over the year preceding the survey, 15% of the households
took credit of at least birr 500. More than a third of them have at
least one migrating member over the past two years for various
reasons. The migrating rate reaches almost half in small towns. In
a tenth of the households, there exists some form of child labor and
it is over thrice more prevalent in small towns (20%) than in
medium and large towns (6%). While illiteracy is significantly
244
higher in small towns (42%) than in medium/large towns (23%),

as they are not completing a certain level of education.
Overall, food and non-food monthly expenditures are
significantly higher among households living in medium/large
towns than in small towns. International remittances are received
by about 1 in 10 urban households. Price and non-price shocks are
also rampant in urban Ethiopia. For example, 30% of them suffer
from food price rises during the previous year with no significant
disparities by town size. Health, primary school, and microfinance
branches are reported to be available at community (enumeration
area) levels in over two-thirds of the households though small
towns are better than medium or large towns.
245
Table 5.2: Demographic and socioeconomic characteristics of urban households by town size
Test for
Variable All urban Ethiopia Small town Medium & large
difference
Mean SD Mean Mean p-value
Household head is female 0.41 0.492 0.39 0.43 0.123
Household head’s age 42.25 14.941 44.29 43.45 0.049**
Household head is young (<35y) 0.37 0.482 0.27 0.35 0.003***
Household size 3.88 2.127 4.35 3.84 0.000***
Household head is married 0.59 0.492 0.65 0.56 0.003***
Household head is Christian 0.82 0.387 0.73 0.82 0.002***
Household head is Muslim 0.18 0.384 0.26 0.18 0.002***
Household has migrant members 0.38 0.485 0.48 0.32 0.000***
Household head is working 0.58 0.493 0.57 0.57 0.926
Any child is working 0.10 0.297 0.20 0.06 0.000***
Share of females in working age (15-60y) 0.56 0.302 0.55 0.56 0.420
Head’s education: illiterate 0.26 0.438 0.41 0.23 0.000***
Head’s education: elementary 0.29 0.453 0.29 0.32 0.282
Head’s education: high school 0.22 0.416 0.11 0.22 0.000***
Head’s education: above high school 0.23 0.422 0.18 0.23 0.044**
Monthly expenditure (adult equivalent) 885.44 675.314 697.74 1027.43 0.001***
246
Test for
Variable All urban Ethiopia Small town Medium & large
difference
Mean SD Mean Mean p-value
Monthly food expenditure (ad. eq.) 577.71 513.900 480.03 668.75 0.027**
Monthly non-food expenditure (ad. eq.) 261.49 263.327 201.05 302.11 0.001***
Household owns the dwelling 0.48 0.500 0.66 0.42 0.000***
Taken credit of at least birr 500 in a year 0.15 0.353 0.14 0.15 0.550
Received international remittances 0.09 0.281 0.06 0.10 0.003***
Shock faced: food price rise 0.29 0.455 0.27 0.32 0.033**
Shock: non-price 0.11 0.309 0.11 0.10 0.443
Community has health clinic 0.76 0.428 0.85 0.74 0.000***
Community has public primary school 0.76 0.425 0.80 0.76 0.095*
Community has microfinance
0.69 0.464 0.74 0.68 0.028**
institution
Notes: SD=Standard deviation. *, ** & *** show an estimate in small towns is statistically different from that in
medium/large towns at 10%, 5% & 1% level, respectively. For categorical variables, proportion test is used. All
observations are weighted to make estimates representative.
Source: Based on data from ESS 2015/16.
247
5.3.2. Unidimensional Poverty, Deprivations, and Inequality

Measuring welfare using only monetary indicators gives
poverty incidence, intensity/gap, and severity at 38%, 13%, and
6%, respectively (). Corresponding official figures during the same
year (2015/16) in urban Ethiopia are much lower at 15%, 4%, and
1.4% (NPC, 2017)1. Although the incidence of monetary poverty
does not significantly vary with the head’s sex, the gap and
severity of poverty are higher among female-headed households.
Households in small towns are worse off in all measures of
monetary poverty. Unlike previous findings (Goshu, 2019; NPC,
2017), the estimates show that urban monetary poverty measures
are lower than the national averages in Addis Ababa and in regions
with a higher rate of urbanization in regions such as Tigray.
Urban monetary poverty in the regions of the Amhara and
the SNNP fall above the national averages. Monetary inequality
measure (Gini coefficient) based on consumption expenditure in
urban Ethiopia is estimated to be 0.37 which contrasts with the
official figure of 0.38 during the same period (2015/16).
Differences exist when disaggregated by town size and regions
where the metropolitan Addis Ababa has the lowest Gini at 0.31
while urban areas of the SNNP region are the most unequal at Gini
of 0.46.
1
However, this should be taken cautiously; ESS’s food expenditure data
are on selected items which may overestimate food and overall poverty
rates.
248
Table 5.3: Monetary poverty and inequality indices in urban

Ethiopia: 2015/16
headcount
Coefficien
Poverty
Poverty
Poverty
severity
Gini
t(G)
(P0)
(P1)
(P2)
gap
All urban Ethiopia 0.38 0.13 0.06 0.37
Head's sex
Male 0.37 0.12** 0.05** 0.37
Female 0.41 0.15 0.07 0.37
City/town size
Medium/large 0.33*** 0.10*** 0.04*** 0.35
Small town 0.55 0.22 0.12 0.37
Urban region
Addis Ababa 0.26 0.07 0.03 0.31
Amhara 0.50 0.17 0.08 0.35
Oromia 0.37 0.13 0.07 0.34
SNNP 0.39 0.14 0.07 0.46
Tigray 0.32 0.09 0.03 0.36
Other regions 0.37 0.15 0.08 0.34
Notes: *, ** & *** show an estimate of a group (e.g., male) is statistically
different from that of the other group just below it (e.g., female) at 10%,
5% & 1% level, respectively. 1In 2015/16, official annual adult equivalent
poverty line was birr 7,184 (NPC, 2017). All observations are weighted
to make estimates representative. SNNP=Southern Nations, Nationalities
and Peoples. “Other regions” represents the regions of Afar,
Benishangul-Gumuz, Gambella, Harari and Somali, and Dire Dawa city
administration. ESS data are not separately representative in these
regions.
249
Nonmonetary deprivation rates for the whole sample and

by selected socioeconomic groups are presented in Table 5.4.
Monetary poverty indicators are also reported to give a
complete picture. In general, there is a considerable deprivation in
indicators of living standards with a high prevalence of food and
non-food poverty. There also exist certain disparities in
deprivations when disaggregated by the head’s sex and town size.
Deprivations in education in urban Ethiopia are the lowest of all
the deprivations measured. Six percent of households have no
member receiving formal education with a similar proportion
reporting to host a school-age child not in school during the time
of the survey. In a tenth of the households, their lives at least one
under-seven-year-old child whose height-for-age is below WHO’s
standards (stunted). This child nutrition deprivation is
substantially higher in male-headed households (13%) than in
female-headed ones (5%). Drinking water is not safe for 7% of the
urban households in the sample and female-headed households are
slightly worse off (9%). Sanitation constitutes the largest
deprivation within the health dimension where 27% of the
households lack improved sanitation facilities, reaching as high as
39% of them among households in small towns.
250
Table 5.4: Unidimensional deprivations in monetary and nonmonetary welfare indicators in urban
Ethiopia by head’s sex and location: 2015/16
All sample: Head’s sex Town size
Dimension Indicator urban Medium/ Small
Male Female
Ethiopia large town town
Education Formal education 0.06 0.04** 0.07 0.05 0.08
(0.008) (0.010) (0.012) (0.008) (0.020)
Child enrolment 0.06 0.05 0.06 0.06 0.06
(0.006) (0.009) (0.010) (0.007) (0.011)
Health Child nutrition 0.10 0.13*** 0.05 0.09 0.12
(0.012) (0.016) (0.010) (0.013) (0.026)
Safe water 0.07 0.06* 0.09 0.08 0.06
(0.016) (0.012) (0.025) (0.019) (0.022)
Sanitation 0.27 0.26 0.29 0.23*** 0.39
(0.027) (0.029) (0.034) (0.030) (0.053)
Living standards Electricity 0.10 0.07 0.15 0.09 0.14
(0.032) (0.020) (0.056) (0.041) (0.039)
Cooking fuel 0.80 0.80 0.80 0.75*** 0.95
(0.030) (0.033) (0.034) (0.039) (0.019)
Over-crowding 0.13 0.15* 0.10 0.12 0.16
(0.013) (0.018) (0.017) (0.015) (0.031)
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All sample: Head’s sex Town size

Dimension Indicator urban Medium/ Small
Male Female
Ethiopia large town town
Floor 0.53 0.50 0.56 0.47*** 0.73
(0.036) (0.037) (0.044) (0.046) (0.041)
Information 0.09 0.05*** 0.15 0.07*** 0.18
(0.016) (0.012) (0.026) (0.020) (0.027)
Monetary poverty Food poverty 0.29 0.27* 0.32 0.25*** 0.42
(0.023) (0.026) (0.027) (0.025) (0.047)
Non-food poverty 0.68 0.69 0.68 0.64*** 0.81
(0.023) (0.028) (0.028) (0.027) (0.033)
Notes: *, ** & *** show an estimate of a group (e.g., male) is statistically different from that of the other group just on
the right (e.g., female) at 10%, 5% & 1% level, respectively. 1In 2015/16, official annual adult equivalent food, non-
food and overall poverty lines were birr 3772, 3412 and 7184 respectively (NPC, 2017). Standard errors in parentheses.
All observations are weighted to make estimates representative.
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Deprivations in indicators of living standards are among

the highest in urban Ethiopia. For example, a tenth of the
households has no electricity while a staggering 80% (95% in
small towns) use unimproved cooking fuel. With regard to the
housing problem, 13% of households have at least three of their
members living in a single room. Over half of the houses have their
floor made from natural, non-permanent material. This deprivation
reaches about three quarters in small towns and is yet a major
concern in medium and large towns (47%). About 1 in 10
households (as high as 1 in 5 in small towns) is disconnected from
current information due to a lack of information-providing assets.
People in female-headed households are also highly deprived of
information (15%). Food poverty is also high in urban Ethiopia
where 29% are not able to meet the national poverty line of birr
3772 per year per adult equivalent. Female-headed households
(32%) and those living in small towns (42%) are the most affected
in food poverty, and yet a quarter living in medium and large towns
are food-poor. During the same period (2015/16), the official food
poverty headcount rate in urban Ethiopia was reported to be 15%
while it was 28% in 2010/11 and 35% in 2004/05 (NPC, 2017).
Non-food poverty at 68% is over twice higher than food poverty
and it significantly varies by town size.
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Figure 5.1: Deprivations in monetary and nonmonetary

indicators in urban Ethiopia by region (%)
Notes: All observations are weighted to make estimates representative.

SNNP=Southern Nations, Nationalities and Peoples. “Other regions”
represents the regions of Afar, Benishangul-Gumuz, Gambella, Harari
and Somali, and Dire Dawa city administration. ESS data are not
separately representative in these regions.
254
The regional disparity in raw deprivations is depicted in

Figure 5.1. Substantial variations exist in deprivations in almost all
indicators across regions in urban Ethiopia. Compared with the
national urban average (6%), deprivation in formal education is
higher in Tigray (10%), Amhara (9%), and other less populated
regions (11%). However, Addis Ababa (2%) and Oromia (3%) are
better performers. Deprivation in child enrolment is almost fairly
distributed in all regions. Nutrition deprivation measuring under-
7-years-old-child is stunted in the household which is the highest
in Oromia followed by Tigray, the SNNP, and other regions. With
regards to access to safe drinking water, the SNNP (12%), the
Amhara (10%), and other regions (10%) have deprivations above
the national average of 7%. Lack of sanitation is among the
deprivations having big regional differences with the Amhara
region (37%) followed by Tigray (29%) performing poorly
compared with Addis Ababa (20%).
The Amhara region is an outlier in terms of lack of access
to electricity with 25% of urban households deprived while the
national average is 10% and 2% in Addis Ababa. Use of unhealthy
cooking fuel is the most widespread across all regions in Ethiopia.
This deprivation ranges from 95% in the SNNP region to 36% in
Addis Ababa. Housing deprivation in terms of overcrowding also
exhibits regional disparities ranging from 21% in Tigray to 9% in
the Amhara region. However, housing quality is questionable as
77% of households in the Amhara region live in houses whose
floor are built with only natural and non-permanent materials.
Oromia and other regions also have floor deprivations higher than
the national average. Housing floor deprivation is expectedly the
lowest in Addis Ababa (22%) compared with other urban areas in
the country though it is higher for a metropolitan city. This adds to
the result that the City has one of the highest crowds (17%) in the
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country. Information deprivation is the lowest in Addis Ababa and

is the highest in urban areas of Amhara region. With regard to food
poverty, except for the outliers Amhara region (38%) and Tigray
(18%), the headcount figures remain between 25% and 30%
respectively. Apart from worrisome higher incidences throughout,
no substantial differences are noticed among regions on non-food
poverty.
Before analyzing the overall picture of poverty and
inequality in a multidimensional context, it is worthwhile to see
the deprivation score which is the weighted sum of deprivations in
all indicators. The score is depicted as a density curve in Figure
A.1 in the Appendix, disaggregated by town size and region. There
exist large disparities in overall household deprivation across
towns and regions. Notably, small towns and the Amhara region
have the highest accumulation of multidimensional deprivation in
urban Ethiopia since their distribution curve remains atop other
comparison groups. In contrast, medium and large towns, and
hence Addis Ababa, have the lowest cumulative deprivations.
5.3.3. Multidimensional Poverty and Inequality

The multidimensional poverty and inequality measures
analysis is presented below with the distribution multidimensional
welfare by gender and location.
5.3.3.1. Overall multidimensional poverty and inequality measures

Multidimensional poverty and inequality measures in
urban Ethiopia are summarized in Table 5.5. There exists a high
incidence of multidimensional poverty (H) where 30% of the
households live below the multidimensional poverty line with high
intensity (A) reaching 45% of deprivation in weighted indicators.
The figures make the adjusted multidimensional poverty index
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(M) 0.13. Using DHS 2016 data, UNDP & OPHI (2019) estimate
the incidence, intensity, and an adjusted MPI in urban Ethiopia as
37%, 44%, and 0.16 respectively although they do not include a
monetary poverty dimension.
With regard to multidimensional inequality, the overall
index in urban Ethiopia is estimated to be 0.10 while the inequality
among the multidimensionally poor is 0.048. A nearly similar
index for inequality among the multidimensionally poor for
Ethiopia reported at the Human Development Report using DHS
2016 data is 0.024 (UNDP, 2019) whereas Seth & Alkire (2014)
estimate a high value of 0.129 for 2011, hinting that inequality
among the poor rose between 2011 and 2016. In contrast, using a
different approach to estimate for urban and rural areas, Goshu
(2019) finds that multidimensional inequality increases with
urbanization.
The issue of how multidimensional poverty and inequality
vary with the choice of multidimensional poverty cut-off is an
important point in the study. These measures thus are estimated at
various cut-offs whose results are summarized in Table A.2 in the
Appendix. At the worst extreme scenario, when the
multidimensional poverty line is taken as being deprived in at least
5% of the weighted indicators (k=0.05), 95% of households are
multidimensionally poor at an average intensity of 28% making an
adjusted MPI of 0.26. Inequality among the multidimensionally
poor stands at 0.094. At the other extreme cut-off of 0.80 or more,
only 0.1% are poor with the average intensity of 85% but almost
no one is in MPI. Inequality among the multidimensionally poor is
0.001 implying almost all at the highest deprivation cut-off are
equally poor. Recall that when the weighted deprivation score falls
in the range 0.20–0.33, a household is vulnerable to
multidimensional poverty, while at 0.50 or higher, severe
257
multidimensional poverty sets in. Accordingly, another 30% are at

risk of sliding into multidimensional poverty in urban Ethiopia
while 7% live in severe multidimensional poverty.
258
Table A 2:. Multidimensional poverty and inequality at various cut-offs in urban Ethiopia: 2015/16
Multidimensional welfare Multidimensional poverty cut-off (k)

measure k=0.05 k=0.10 k=0.20 k=0.33 k=0.50 k=0.67 k=0.80
Multidimensional poverty 0.95 0.87 0.60 0.30 0.07 0.01 0.001

headcount (H) (0.011) (0.016) (0.029) (0.024) (0.011) (0.005) (0.001)
Average intensity of 0.28 0.30 0.36 0.45 0.62 0.75 0.85

deprivation (A) (0.009) (0.008) (0.007) (0.008) (0.011) (0.016) (0.003)
Adjusted multidimensional 0.26 0.25 0.21 0.13 0.04 0.01 0.00

poverty index (M) (0.010) (0.011) (0.013) (0.012) (0.007) (0.004) (0.001)
Inequality among the 0.094 0.083 0.063 0.048 0.028 0.012 0.001
multidimensionally poor (Ih) (0.007) (0.006) (0.006) (0.007) (0.006) (0.004) (0.000)
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Table 5.5: Multidimensional poverty and inequality indices in urban Ethiopia: 2015/16
Multi- Adjusted Inequality
Average Multi-
dimensional multi- among the
intensity of dimensional
poverty dimensional multidimensio
deprivations inequality
headcount poverty index nally poor
(A) (I)
(H) (M) (Ih)
Urban Ethiopia 0.30 0.45 0.13 0.10 0.048
Head's sex
Male 0.29* 0.44* 0.12* 0.09** 0.039**
Female 0.33 0.47 0.15 0.12 0.057
City/town size
Medium/large 0.25*** 0.45 0.11*** 0.10 0.045
Small town 0.49 0.46 0.22 0.10 0.051
Urban region
Addis Ababa 0.14 0.41 0.05 0.07 0.024
Amhara 0.43 0.46 0.20 0.11 0.045
Oromia 0.32 0.44 0.14 0.10 0.043
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Multi- Adjusted Inequality

Average Multi-
dimensional multi- among the
intensity of dimensional
poverty dimensional multidimensio
deprivations inequality
headcount poverty index nally poor
(A) (I)
(H) (M) (Ih)
SNNP 0.31 0.46 0.14 0.11 0.057
Tigray 0.24 0.43 0.10 0.08 0.021
Other regions 0.30 0.46 0.14 0.12 0.086
Notes: k=0.33 is used as multidimensional poverty cut-off. *, ** & *** show an estimate of a group (e.g., male) is
statistically different from that of the other group just below it (e.g., female) at 10%, 5% & 1% level, respectively. All
observations are weighted to make estimates representative. Standard errors are not reported for brevity; they can be
available upon request. SNNP=Southern Nations, Nationalities and Peoples. “Other regions” represents the regions of
Afar, Benishangul-Gumuz, Gambella, Harari and Somali, and Dire Dawa city administration. ESS data are not
261
5.3.3.2. Distribution of multidimensional welfare by gender and

location
Female-headed families are also worse off on
multidimensional welfare. Multidimensional poverty is
significantly higher in households headed by females (0.15)
compared to those headed by their males’ counterparts (0.12)
(Table 5.5). The difference comes from both the incidence and
intensity of poverty. Multidimensional inequality and the
inequality among the multidimensionally poor are also
substantially higher among female-headed households than the
national urban average and male-headed households.
Regarding the distribution across regions, considerable
disparities are observed particularly in the proportion of people
living in multidimensional poverty. Like in the case of single and
weighted deprivations, households in the urban Amhara region at
incidence, intensity, and adjusted MPI of 43%, 46%, and 0.20,
respectively, are the most multidimensionally poor while those in
Addis Ababa city are the least poor ones at 14%, 41% and 0.05.
Urban areas in Oromia and the SNNP regions are also other
hotspots of multidimensional poverty. There is some regional
variation in multidimensional inequality. A notable finding is that
the most urbanized Tigray region and Addis Ababa city have the
lowest overall multidimensional inequality.
Urbanization is widely thought to improve the welfare of
people while some argue that it does little to urban poverty
particularly in SSA (Ravallion et al., 2007; Todaro & Smith,
2012). However, the estimates in the study support the first
hypothesis. That is, multidimensional poverty headcount in small
towns is twice that in medium/large towns with no significant
difference in intensity. Besides this evidence, the corresponding
regional urbanization rates can be related to regional welfare
estimates (proportion of the total population living in urban areas)
262
obtained from CSA (2013). As depicted in Figure 5.2, the association

urbanization has with multidimensional poverty and inequality as
well as with monetary poverty takes the shape of an inverted-U while
it generally seems to be inversely related to multidimensional
inequality. These pro-urbanization findings are against Goshu's
findings (2019) that states multidimensional poverty and inequality
increase with urbanization.
Figure 5.2: Urban monetary and multidimensional poverty

headcounts and inequality by region and
urbanization rate: 2015/16
Notes: Regions are sorted in ascending order of their urbanization rate.

SNNP=Southern Nations, Nationalities and Peoples. “Other regions”
represents the regions of Afar, Benishangul-Gumuz, Gambella, Harari
and Somali, and Dire Dawa city administration. ESS data are not
Source: Based on data from ESS 2015/16 and CSA (2013) Population
Projections for 2016 (for urbanization).
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5.3.4. Sources of Multidimensional Poverty and Inequality

Multidimensional poverty in urban Ethiopia is estimated
to be the highest with a significant portion of vulnerability to it. As
one step to curb the situation, identifying the most contributing
factors and locations of accumulation is crucial. To that end, the
contribution to adjusted multidimensional poverty of indicators,
dimensions, and population groups are estimated. Regressions are
also used to identify micro- and community-level factors that have
associations with poverty and inequality. Lastly, macro-level
opportunities and challenges to reducing urban poverty and
inequality in urban Ethiopia are highlighted.
5.3.4.1. Decomposition of multidimensional poverty by indicators

and population groups
Figure 5.3 depicts the contributions of indicators and
dimensions to the adjusted multidimensional poverty in urban
Ethiopia. As shown on the left panel, most of the multidimensional
poverty comes from the monetary poverty dimension (48%), of
which (right panel) 28% is from non-food poverty and the rest 20%
from food poverty. The dimension of living standards at 29%
which is mainly contributed by deprivations in cooking fuel (11%)
and floor of dwellings (10%). Health dimension contributes only
15%, mainly due to sanitation deprivation (10%). Education is the
least contributor at 8% with equal shares from deprivations in any
member’s formal education and child enrolment. Large
contributions of monetary and living standards dimensions in
Ethiopia are also evidenced by Goshu (2019) as they are estimated
at 44% and 16% respectively at the country level. An annual
Human Development Reports, where the multidimensional
poverty index is estimated without a monetary dimension, the
264
living standards dimension is always the dominant contributor

(UNDP, 2019).
Given their population shares, how do various population
groups contribute to overall multidimensional poverty? Figure 5.4
contains answers to the question with selected groups. It is found
that female-headed households are slightly overrepresented in the
multidimensional poverty as they contribute 44% while their share
in the urban population is 41%. However, the contribution of
households in small towns (39%) is huge compared with their
population share (24%).
265
Figure 5. 3: Contributions of dimensions and indicators to overall multidimensional poverty in urban

Ethiopia: 2015/16
266
Figure 5.4: Contributions of population groups to multidimensional poverty in urban Ethiopia: 2015/16
267
Regional contributions to the adjusted multidimensional

poverty are plotted in Figure 5.5. As expected, the county’s most
populous regions, Oromia and the Amhara, contribute much of the
urban multidimensional poverty. However, the Amhara region,
though having an 18% share in the country’s urban population,
contributes as much as twice (35%) to adjusted multidimensional
poverty. Oromia still contributes more than its population (21%)
to the MPI (29%). Urban population share and contribution to
poverty almost match only for the SNNP. Addis Ababa city and
Tigray region are the least contributors towards multidimensional
poverty relative to their share in the country’s urban population.
Figure 5.5: Contributions of regions to multidimensional poverty

in urban Ethiopia 2015/16
Notes: Figures in parentheses represent percentage contributions of a

region in the total urban population. SNNP=Southern Nations,
Nationalities and Peoples. “Other regions” represents the regions of Afar,
Benishangul-Gumuz, Gambella, Harari and Somali, and Dire Dawa city
administration. ESS data are not separately representative in these
regions.
268
5.3.4.2. Micro- and community-level factors associated with

multidimensional welfare
Answering the question of what factors at household and
community levels could be associated with welfare is also crucial
to designing policies for improvement. We run several regressions
of selected deprivations, monetary and multidimensional poverty,
and inequality for the whole urban sample, small towns, and
medium/large towns. The results are summarized in the Appendix.
Table A.4 provides the correlation between monetary
poverty and child stunting. After controlling for demographic and
geographic factors, monetary poverty is found to be lower in
households headed by those with at least primary education.
Living in places where microfinance institutions are available and
access to credit are also associated with lower monetary poverty.
Similarly, child stunting is positively correlated with family size
and negatively with home ownership and taking up of credit
especially in small towns. The correlation between overcrowding
and unimproved cooking fuel deprivations are presented in Table
A.5 in the Appendix. Besides demographic and geographic factors,
those with educated heads, in higher expenditure quintiles, and
homeowners are less likely to be deprived of overcrowded
housing. While receiving at least a primary education is negatively
associated with deprivation in cooking fuels, non-price shocks
have a chance to increase the deprivation.
An attempt has been made to identify factors that have
associations with households’ multidimensional poverty status and
inequality (measured as a variation from the average weighted
deprivation score). Findings are available in Table A.6 in the
Appendix. Demographic factors such as female headship,
increasing head’s age and large household size increase the
probability of being multidimensionally poor. Multidimensional
269
poverty is higher in households with a working child and lowers

with higher shares of working adult females. Financial factors are
also important factors where those having access to credit,
receiving remittances, and living closer to microfinance
institutions have a lower chance of falling into multidimensional
poverty. The presence of a primary school in the community is also
correlated negatively with multidimensional poverty. Our previous
finding that multidimensional poverty is high in small towns and
regions of the Amhara and Oromia regions (relative to Addis
Ababa) is also confirmed when other factors are controlled in the
regressions. Regarding multidimensional inequality, apart from
certain demographic and geographic factors, taking credit,
receiving international remittances, and a nearby primary school
are found to reduce overall multidimensional inequality and that
among the multidimensionally poor. In contrast, shocks in the
form of food price rise worsen the level of inequality.
5.3.4.3. Macro-context and multidimensional welfare

There are numerous opportunities for and constraints to
reducing urban multidimensional poverty and inequality in
Ethiopia. While a full analysis of the macroeconomic
developments and policy options are presented in the study, the
macro-context that could be related to multidimensional welfare in
Ethiopia is highlighted. As a first opportunity, there seems to be an
overall government commitment and policy framework.
Governments in Ethiopia have had a history of preparing
development plans including addressing poverty and inequality.
Recent ones include SDPRP (2006–2006), PASDEP (2006–2010),
GTP I (2010/11–2014/15), and GTP II (2014/15–2019/20).
The current government is also expected to unveil a 10-
year perspective plan. Besides, policy frameworks and
270
commitment in terms of spending have also been noticed. For

example, recent trends in poverty-targeted expenditures
(education, health, agriculture, roads, water) over the period
2011/12–2015/16 averaged over two-thirds of total government
expenditure (NPC, 2017). However, there are related constraints,
including, among others (i) lack of efficiency by government
agencies including implementation of policies at lower tiers of
government, (ii) poor expenditure and project management
coupled with corruption not only increases the public debt but also
does result in inflation when projects take too long to offer the
desired outputs while billions of funds are pumped into them, and
(iii) poor provision and distribution and/or high cost of public
infrastructures such as electricity, safe water, and improved
cooking fuel.
Our estimates suggest that there can be gains if these
inefficiencies are improved. For instance, a simple simulation
exercise on the effect of universal coverages of education, safe
drinking water, electricity, and improved cooking fuel on
multidimensional welfare gives interesting results. As summarized
Figure 5.6, if urban local governments have made sure that every
school-age child got enrolled in and adults received any level of
formal education, multidimensional poverty headcount would
drop by 3 percentage points to 27%, and adjusted MPI would
become 0.11. If a universal coverage of safe drinking water,
electricity, and improved cooking fuels could be achieved, more
reductions in multidimensional poverty and inequality would be
realized. Using a joint of these public interventions,
multidimensional poverty would be halved with moderate
reductions in its intensity and multidimensional inequality.
271
Figure 5.6: Effect of universal coverage of publicly provided

basic services on multidimensional welfare in
urban Ethiopia: simulated
Notes: *Refers to universal access to water, electricity and improved

cooking fuel. Standard errors in parentheses. All observations are
weighted to make estimates representative.
272
Figure 5.7: Recent trends of economic growth and monetary and

multidimensional poverty and inequality in
Ethiopia: 2000–2016
Source: Based on Alkire & Roche (2013), NPC (2017), NBE (2017),
UNDP (2010, 2015, 2019).
The second opportunity is that there has been economic

growth over the past many years, and this is expected to continue
in the years to come. However, the quality of recent past growth is
questionable. Since 2000, four Demographic and Health Surveys
and Household Income Consumption and Expenditure (HICE)
surveys were conducted. Based on the survey findings both
monetary and multidimensional welfare measures in Ethiopia were
estimated. Collecting these estimates from various sources and
273
corresponding real per-capita GDP growth data from the National

Bank of Ethiopia (NBE), trends have been plotted in Figure 5.7.
A result that stands out is that the association between micro-level
welfare and macro-context in terms of real per-capital GDP has
not been uniform. Over 2000–2016, while monetary poverty
headcount was halved, multidimensional poverty headcount fell
only by 10 percentage points. Over the five years spanning 2011–
2016, when economic growth was the fastest, multidimensional
poverty headcount was virtually flat. The entire fifteen years were
also characterized by a rise in expenditure inequality as measured
by the Gini coefficient.
As a third opportunity, a fairly large number of
microfinance institutions exist in Ethiopia. According to the
National Bank of Ethiopia, 46 microfinance institutions have been
in operation in the country beginning from July 2020. Moreover,
70% of urban households live in communities having a
microfinance institution. However, ESS 2015/16 data show that
household credit comes primarily from informal sources with
formal or microcredit covering only 27% in urban areas. Despite
the findings of the study, taking credit by households as well as the
availability of a microfinance institution at the community level
have desirable correlations with monetary and multidimensional
poverty and inequality.

5.4.1. Conclusions
Ethiopia, as discussed in Chapters 3 and 4, is fast
urbanizing. In 2050, about 40 percent of its population will live in
urban areas. Although one may view urbanization as an integral
part of economic growth and poverty reduction, it is evident that
urbanization is correlated with poverty and inequality in sub-
274
Saharan Africa. Besides, there is a lack of well-documented

evidence on urban Ethiopia about poverty and inequality using
recent developments in multidimensional welfare analysis tools.
This study, hence, aimed at filling these gaps by analyzing
Ethiopia’s urban multidimensional and monetary poverty and
inequality levels that links to the macro-context, constraints,
opportunities, and policy issues.
The multidimensional poverty and inequality indices
analyzed use four dimensions, namely, education, health, living
standards, and monetary poverty, represented by twelve indicators
relevant to Ethiopian’s contexts that are related to the literature and
SDGs. Though we keep many indicators of the global MPI,
customizing to the Ethiopian urban setting is made by adding four
indicators and a monetary dimension. Once unidimensional
indices of poverty and inequality are estimated, they are extended
to multidimensional indices. The distributions across and
contributions of population groups and dimensions/indicators to
overall poverty are analyzed. Econometric models are estimated to
identify the correlation between multidimensional poverty and
inequality. The link between micro-level welfare estimates to the
macro-level context is also discussed. The data primarily come
from the urban sub-sample of ESS 2015/16 which is an LSMS-
ISA project of the World Bank. Supplementary data and
information also come from various sources.
Findings reveal a large prevalence of food and non-food
poverty as well as substantial nonmonetary deprivation
particularly in indicators of living standards such as housing and
cooking fuels. The national deprivation and poverty rates generally
mask substantial variations across male-female headship, small
town-medium/large town, and region. Notably, many of the
deprivations are found to be higher in female-headed households,
275
small towns, and the Amhara region. The estimated monetary

poverty incidence (38%), gap (13%), and severity (6%) are found
to be higher than the official figures. With an adjusted
multidimensional poverty index of 0.13, constituted by the
incidence of 30% and intensity of 45%, multidimensional poverty
in urban Ethiopia is one of the highest. Another 30% are at risk of
sliding into multidimensional poverty. About half of the overall
multidimensional poverty comes from monetary poverty followed
by deprivations in living standards (30%), health (15%), and
education (8%). Overall multidimensional inequality index in
urban Ethiopia and inequality among the multidimensionally poor
are 0.10 and 0.048, respectively. The figures may be lower, given
a monetary Gini coefficient of 0.37, but inequalities among regions
and within female-headed households are large.
Poverty and inequality seem to fall with urbanization
while regional differences are large. For example, households in
the urban Amhara region have the highest incidence and adjusted
MPI while those in Addis Ababa city are the least deprived and
poor ones. The most urbanized, Addis Ababa city and Tigray
region, have the lowest multidimensional poverty and inequality
rates. In contrast, small towns and those in regions of Amhara and
Oromia contribute significantly to urban multidimensional poverty
compared to their population shares. Although there seems to be
overall government commitment, policy framework, and
economic growth as opportunities, numerous constraints challenge
efforts of reducing poverty and inequality. Fast economic growth
over the past 15 years is reported to have halved monetary poverty
though multidimensional poverty declined very steadily while
monetary inequality slightly rose. In addition to demographic and
geographic factors, receiving remittance, access to credit,
availability of microfinance institutions and primary schools at the
276
community-level, and food price shocks are among the factors that
are correlated with various indicators of household welfare in
urban Ethiopia. For instance, shocks in the form of food price rises
worsen the multidimensional inequality.
5.4.2. Policy Implications

Most of the policy options that could be pursued for the
reduction of the multidimensional poverty and inequality in urban
Ethiopia seem to be stated by the findings themselves. The finding
of substantial deprivation particularly in indicators of living
standards dimension, which ranks as the second most contributor
to overall multidimensional poverty, clearly needs intervention. As
these deprivations include publicly provided infrastructural
services such as electricity and drinking water, it is crucial that the
government must pursue a policy of affordable provision. With
universal coverage of electricity, improved cooking fuel, safe
water, and education services, the simple simulation exercise
shows that overall multidimensional poverty can be reduced by
half. Given that lack of improved cooking fuels is always among
the top deprivations in Ethiopia, it, therefore, requires special
intervention. Relating it to universal access to electricity and
promoting the use of alternative sources of clean household energy
may be of paramount help. Addressing the housing problems in
urban areas, besides reducing household level overcrowding, is
thought to have multiplier welfare effects.
Large incidences of food and non-food poverty, jointly
contributing to the largest share of overall multidimensional
poverty with the desire for a call for interventions. Parametric
evidence implies policies advocating gendered interventions,
family planning, and provision of education, credit, and
employment opportunities. On the other hand, the findings of
277
notable disparities among regions and higher rates of deprivations,

monetary poverty as well as multidimensional poverty and
inequality in small towns automatically call for installing fair
distribution systems. Given that poverty and inequality are found
to fall with urbanization, a policy direction towards planned
urbanization is also recommended.
Promoting household access to microcredit and other
sources of finance are also another vital strategy. The National
Bank of Ethiopia needs to promote innovative forms of
microcredit access to the poor by the financial institutions under
its supervision. Stabilizing prices, especially of food, has effects
on all forms of poverty and inequality. As the link between
economic growth and poverty reduction is not perfect and with
undesirable effects on inequality, redistribution policies including
social protection programs for those in severe welfare deprivations
may also be useful.
Lastly, it is recommended to use a multidimensional
approach, rather than only a monetary one, to welfare
measurement by the Ethiopian government. Assessment of the
country’s progress in urban and rural areas towards the reduction
of poverty and inequality, as reported by the National Planning and
Development Commission, relies only on expenditure-based
poverty and inequality indices. As welfare is multidimensional,
such a comprehensive approach which also reports monetary
welfare measures will help monitor progress from various
dimensions. It not only aligns the country’s overall welfare
measures to the SDGs (target 1.2) and track progress from the
HDR but also makes the country to join up an increasing list of
countries which officially use the multidimensional approach. The
list of countries includes Angola, Ghana, Mozambique, Nigeria,
Rwanda, Sierra Leone, and Seychelles.
278
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Appendices
A1. Aggregation of multidimensional poverty and inequality

We follow procedures of the AF framework (Alkire &
Foster, 2009, 2011) to identify households as multidimensionally
poor. The single raw deprivation rates or headcount ratios (ℎ𝑗 ) for
each indicator 𝑗 are computed as
𝑁
1
ℎ𝑗 = 𝑁 ∑ 𝐼(0,1) (𝑦𝑗𝑖 ≤ 𝑧𝑗 )
𝑖=1
where 𝐼(0,1) (𝑦𝑗𝑖 ≤ 𝑧𝑗 ) is an indicator function taking 1 if the

expression in parenthesis is satisfied and 0 otherwise; 𝑦𝑗𝑖 is
attainment by household 𝑖 in indicator j; 𝑧𝑗 is the cut-off in
indicator 𝑗, also called indicator-specific poverty line; and 𝑁 is the
number of households. These are equivalent to the headcount rate
(𝑃0 ) in the FGT indices (Foster et al., 1984). Note also that raw
deprivations provide the proportion of households who are
deprived of a specific indicator, regardless of whether they are
deemed multidimensionally poor, i.e. they are not censored by the
multidimensional deprivation status (Apablaza & Yalonetzky,
2012).
The sum of weighted deprivations (𝐶𝑖 ) for each household
𝑖, also called deprivation score, is
𝐷
𝐶𝑖 = ∑ 𝑤𝑗 𝐼(0,1) (𝑦𝑗𝑖 ≤ 𝑧𝑗 )
𝑗=1
where 𝑤𝑗 is the weight given to indicator 𝑗; and 𝐷 is the total

number of indicators. A household is then identified as
286
multidimensionally poor if it is deprived in at least a third of the

weighted deprivations (Alkire & Santos, 2014; UNDP, 2019):
ℎ𝑖 = 𝐼(0,1) (𝐶𝑖 ≥ 𝑘). Censoring at the cut-off and averaging helps
get the aggregate multidimensional poverty headcount ratio (𝐻) as
1 𝑁
𝐻= ∑𝑖=1 𝐼(0,1) (𝐶𝑖 ≥ 𝑘)
𝑁
where 𝑘 is the multidimensional poverty cut-off, 0.33 in our case.

Optionally, once the poor are identified, this can be expressed as
𝑞
𝐻 = 𝑁 where 𝑞 is the number of the multidimensionally poor. We
also consider other thresholds to see the sensitivity of multiple
deprivations to choices of these cut-offs1. The average intensity of
multidimensional deprivations (𝐴) or average percentage of
weighted deprivations (as a proportion of the maximum number of
possible deprivations) suffered by the multidimensionally poor
households is given by
1 𝑁
𝐴 = 𝑁∗𝐷∗ℎ ∑𝑖=1 𝐼(0,1) (𝐶𝑖 ≥ 𝑘) ∗ 𝐶𝑖 .
𝑗
The adjusted multidimensional poverty index (𝑀) is then simply

given by the product
𝑀 = 𝐻 ∗ 𝐴.
To meet the objective of decomposing multidimensional poverty

into dimensions/indicators and population subgroups, we proceed
1
UNDP (2019) considers people in the range 0.20–0.33 as vulnerable to
multidimensional poverty while those with a deprivation score of 0.50 or
higher are in severe multidimensional poverty.
287
as follows. The percentage contribution (𝑄𝑗 ) of indicator 𝑗 to the

adjusted multidimensional poverty 𝑀 is
𝑁
1
𝑄𝑗 = 𝑁∗𝐷∗𝑀 ∑ 𝐼(0,1) (𝑦𝑗𝑖 ≤ 𝑧𝑗 ) ∗ 𝐼(0,1) (𝐶𝑖 ≥ 𝑘)
𝑖=1
where the terms on the right-hand side are as defined previously.

Such a decomposition provides information that can be useful for
revealing the country’s deprivation structure and can help with
policy (UNDP, 2019). If we have 𝑆 number of population
subgroups, the percentage contribution of each subgroup 𝑠 (e.g.
urban region) to the adjusted multidimensional poverty index M is
extracted from the identity
𝑁 𝑁 𝑁
𝑚1 ( 1 ) 𝑚2 ( 2 ) 𝑚𝑠 ( 𝑠 )
𝑁 𝑁 𝑁
𝑀
+ 𝑀
+ ⋯+ 𝑀
=1
where 𝑚𝑠 is the value of 𝑀 in subgroup 𝑠 = 1, 2, … , 𝑆 and 𝑁𝑠 is

the number of households in each subgroup. Each element at the
left-hand side of the equation is, therefore, the contribution of a
specific subgroup.
For multidimensional inequality, we employ the measure

suggested by Seth & Alkire (2014). Their multidimensional
inequality index (𝐼ℎ ) among the multidimensionally poor is given
by
4 𝑞
𝐼ℎ = 𝑞 ∑𝑖=1[𝐶𝑖 − 𝐴]2
288
where 𝑞 is the number of multidimensionally poor households; 𝐶𝑖

is the weighted deprivation score of household 𝑖, as defined earlier;
and 𝐴 is the intensity of multidimensional poverty, as defined
earlier. It can also be computed for the whole household
population by using the overall average deprivation score and
leaving the denominator 𝑞 so that we denote the index by 𝐼.
Weighting of dimensions and indicators is important in
multidimensional welfare analysis. We opt to provide equal
weights to all dimensions, and each indicator in a dimension is
similarly equally weighted. This is the tradition in most of the
literature. However, depending on the availability of further
information and assumptions made, one may also assign subjective
weights (Decancq, Fleurbaey, & Maniquet, 2019) or statistically-
computed weights (Bersisa & Heshmati, 2016; Tigre, 2018).
Besides basing our choices of dimensions and indicators on the
literature and attempting to customize them to the Ethiopian urban
context, we undertake a statistical procedure to test if the indicators
and their weights are relevant following Goshu (2019). Linear
pairwise and nonlinear tetrachoric correlations between the chosen
indicators and the computed multidimensional poverty and
inequality measures are estimated whose results are summarized
in Table A.3 in the Appendix. All correlations with weighted
deprivation score and multidimensional poverty as well as with
multidimensional inequality (except one indicator) are statistically
significant confirming that our chosen indicators along with their
weights are appropriate to analyze multidimensional poverty and
inequality in urban Ethiopia.
289
Table A 1: Distribution of urban households interviewed in

ESS 2015/16 by region and town size
Distribution of households interviewed in
urban areas
Region % of
Small Medium and Urban
urban
towns large towns total
total
Addis Ababa - 241 241 14.8
Amhara 103 193 296 18.2
Oromia 106 236 342 21.0
SNNP 97 180 277 17.0
Tigray 43 189 232 14.3
All other regions 62 175 237 14.6
Urban total 411 1,214 1,625 100.0
% of urban total 25.3 74.7 100.0

Notes: SNNP=Southern Nations, Nationalities and Peoples.
Source: Extracted from ESS 2015/16.
290
Figure A 1:Density curves of weighted deprivation scores in urban Ethiopia by town size
Notes: SNNP=Southern Nations, Nationalities and Peoples. “Other regions” represents the regions of Afar,
Benishangul-Gumuz, Gambella, Harari and Somali, and Dire Dawa city administration. ESS data are not separately
representative in these regions. According to UNDP (2019), households with weighted deprivation cut-off of 0.33 or
higher are identified as multidimensionally poor, those in the range 0.20–0.33 are vulnerable and those with 0.50 or
higher are in severe multidimensional poverty.
291
Table A 2:. Multidimensional poverty and inequality at various cut-offs in urban Ethiopia: 2015/16
Multidimensional welfare Multidimensional poverty cut-off (k)
measure k=0.05 k=0.10 k=0.20 k=0.33 k=0.50 k=0.67 k=0.80
Multidimensional poverty 0.95 0.87 0.60 0.30 0.07 0.01 0.001

headcount (H) (0.011) (0.016) (0.029) (0.024) (0.011) (0.005) (0.001)
Average intensity of 0.28 0.30 0.36 0.45 0.62 0.75 0.85

deprivation (A) (0.009) (0.008) (0.007) (0.008) (0.011) (0.016) (0.003)
Adjusted multidimensional 0.26 0.25 0.21 0.13 0.04 0.01 0.00

poverty index (M) (0.010) (0.011) (0.013) (0.012) (0.007) (0.004) (0.001)
Inequality among the 0.094 0.083 0.063 0.048 0.028 0.012 0.001
multidimensionally poor (Ih) (0.007) (0.006) (0.006) (0.007) (0.006) (0.004) (0.000)
Notes: Standard errors in parentheses. All observations are weighted to make estimates representative.
292
Table A 3: Correlations between indicators and multidimensional poverty and inequality measures in
urban Ethiopia: 2015/16
Correlation with
Dimension Indicator Weighted Multidimensional Multidimensional
deprivation score poverty status inequality
Education Formal education 0.3753*** 0.6188*** 0.3676***
Child enrolment 0.2836*** 0.5901*** 0.1900***
Health Child nutrition 0.2132*** 0.3241*** 0.0910***
Safe water 0.2621*** 0.3768*** 0.3260***
Sanitation 0.5101*** 0.5897*** 0.2112***
Living Electricity 0.4033*** 0.6087*** 0.3816***
standards
Cooking fuel 0.3955*** 0.6167*** –0.0271
Overcrowding 0.2857*** 0.4140*** 0.0729***
Floor 0.5255*** 0.6772*** 0.1131***
Information 0.4387*** 0.6786*** 0.3853***
Monetary Food poverty 0.5942*** 0.8294*** 0.2333***
poverty Non-food poverty 0.6043*** 0.7296*** –0.1087***
Notes: *** denotes correlation is significant at 1% level. The correlation with multidimensional poverty status is
tetrachoric (nonlinear) while other correlations are linear pairwise.
293
Table A 4: Correlates of monetary poverty and child nutrition in urban Ethiopia: 2015/16
Monetary poor Child stunted
Urban Medium/ Small Urban Medium/ Small
Variable Ethiopia Large town Ethiopia Large town
(1) (2) (3) (4) (5) (6)
Head is female 0.081* 0.111** 0.008 –0.032 –0.029 –0.046
Head’s age –0.002 –0.002 0.001 –0.002** –0.002 –0.004*
Household size 0.045*** 0.041*** 0.062*** 0.041*** 0.040*** 0.043***
Has migrant members –0.021 0.019 –0.135* –0.012 –0.033* 0.046
Received international remittances –0.066 –0.105* 0.136 –0.014 –0.011 –0.01
Head’s educ: elementary1 –0.122** –0.172** –0.033 0.025 0.045 0.001
Head’s educ: high school1 –0.206*** –0.261*** –0.057 –0.015 0.020 –0.109*
Head’s educ: >high school1 –0.337*** –0.377*** –0.271** 0.001 0.017 –0.031
Any child is working 0.091 0.085 0.019 –0.011 0.034 –0.077
Females’ share in working age –0.171** –0.187** –0.112 0.04 0.035 0.071
Owns the dwelling –0.018 –0.035 0.020 –0.038* –0.037 –0.029
294

(1) (2) (3) (4) (5) (6)
Taken credit of birr 500 or more –0.096* –0.064 –0.220** –0.022 –0.009 –0.106**
Shocks faced: food price rise –0.007 0.021 –0.047 0.044 0.035 0.078
Shocks faced: non-price 0.031 0.007 0.108 0.055 0.101* –0.063*
Community: gov’t primary school –0.076* –0.128* 0.100 0.03 0.007 0.137**
Community: microfinance instit’n –0.100* –0.094 –0.165 –0.009 0.004 –0.037
Community: daily/weekly market 0.069 0.052 0.128 0.004 0.013 –0.014
Living in small town 0.167** - - 0.006 - -
Region: Amhara2 0.133* 0.108 0.102 0.010 0.016 –0.06
Region: Oromia 2
–0.014 0.010 –0.119 0.063 0.065 –0.042
Region: SNNP2 –0.014 –0.059 0.044 0.038 0.023 –0.005
Region: Tigray 2
–0.023 –0.056 0.016 0.063* 0.079* –0.065
Region: All others2 –0.051 –0.040 - 0.044 0.037 -
295

(1) (2) (3) (4) (5) (6)
Expenditure quintile: poor3 0.050 0.020 0.080
Expenditure quintile: middle3 0.075* 0.082* 0.059
Expenditure quintile: rich3 0.055 0.042 0.090*
Expenditure quintile: richest3 0.06 0.055 0.076
Constant 0.531*** 0.638*** 0.377 –0.095 –0.119 –0.01
Number of observations 1,625 1,214 411 1,625 1,214 411
1
Notes: *, ** & *** show statistical significance at 10%, 5% & 1% levels, respectively. Comparison: illiterate.
2
Comparison: Addis Ababa. 3Comparison: poorest. Multidimensional inequality is proxied by a squared variation of
the household deprivation score from the average. SNNP=Southern Nations, Nationalities and Peoples. All
observations are weighted to make estimates representative. Standard errors are not reported for brevity; they can be
available upon request.
296
Table A 5: Correlates of deprivations in selected living standards indicators in urban Ethiopia: 2015/16
Overcrowded housing Cooking fuels not improved
Urban Medium/ Urban Medium/
Variable Small town Small town
Ethiopia Large Ethiopia Large
(1) (2) (3) (4) (5) (6)
Head is female –0.005 0.006 –0.054 –0.047 –0.048 –0.042
Head’s age –0.004*** –0.004*** –0.002 –0.001 –0.001 0.000
Household size 0.059*** 0.052*** 0.080*** –0.018* –0.024* –0.006
Has migrant members –0.052*** –0.058** –0.036 –0.001 –0.018 0.036
Received international remittances –0.036 –0.021 –0.091 –0.076 –0.066 –0.122*
Head’s educ: elementary1 –0.033 0.012 –0.157** –0.084*** –0.107** –0.036
Head’s educ: high school 1
–0.137*** –0.111*** –0.171** –0.154*** –0.183** –0.085*
Head’s educ: >high school1 –0.120*** –0.083* –0.180** –0.255*** –0.316*** –0.092*
Any child is working –0.005 –0.018 –0.002 0.006 0.023 –0.004
Females’ share in working age –0.037 –0.049 0.036 0.059 0.060 0.076
Owns the dwelling –0.073*** –0.076** –0.080* –0.04 –0.047 0.009
Taken credit of birr 500 or more 0.033 0.036 0.024 0.031 0.039 0.007
297

(1) (2) (3) (4) (5) (6)
Shocks faced: food price rise –0.012 0.005 –0.05 –0.003 –0.002 –0.02
Shocks faced: non-price –0.014 –0.017 –0.016 0.090** 0.139*** –0.065
Community: gov’t primary school 0.04 0.051 –0.021 –0.018 0.001 –0.088*
Community: microfinance institution 0.022 0.011 0.01 –0.027 –0.024 0.014
Community: daily/weekly market –0.016 –0.02 –0.039 0.074 0.082 0.004
Living in small town –0.004 - - 0.060 - -
Region: Amhara2 –0.074 –0.120** 0.215 0.426*** 0.415*** 0.059
Region: Oromia2 –0.083* –0.075 0.028 0.431*** 0.406*** 0.097
Region: SNNP2 –0.085* –0.082* 0.052 0.502*** 0.523*** 0.066
Region: Tigray2 0.028 0.037 0.188 0.271*** 0.275** –0.169
Region: All others2 –0.023 0.016 - 0.424*** 0.408*** -
Expenditure quintile: poor3 –0.192*** –0.160* –0.220** –0.045 –0.069 –0.03
298

(1) (2) (3) (4) (5) (6)
Expenditure quintile: middle3 –0.210*** –0.197** –0.261*** –0.059 –0.057 –0.078
Expenditure quintile: rich3 –0.212*** –0.217** –0.222* –0.077* –0.094 –0.057*
Expenditure quintile: richest 3
–0.239*** –0.266*** –0.142 –0.102** –0.116* –0.092*
Constant 0.430*** 0.448*** 0.213 0.712*** 0.776*** 1.053***
Number of observations 1,625 1,214 411 1,625 1,214 411
Notes: *, ** & *** show statistical significance at 10%, 5% & 1% levels, respectively. 1Comparison: illiterate.
2
Comparison: Addis Ababa. 3Comparison: poorest. Multidimensional inequality is proxied by a squared variation of
the household deprivation score from the average. SNNP=Southern Nations, Nationalities and Peoples. All observations
are weighted to make estimates representative. Standard errors are not reported for brevity; they can be available upon
request.
299
Table A 6: Correlates of multidimensional poverty and inequality in urban Ethiopia: 2015/16

Multidimensional Inequality among the
Multidimensionally poor
inequality multidimensionally poor
Mediu
Variable Urban Small Urban Medium/ Small Urban Medium/ Small
m/
Ethiopia town Ethiopia Large town Ethiopia Large town
Large
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Head is female 0.662*** 0.717*** 0.709* 0.027* 0.031* 0.010 0.018* 0.026* –0.008
Head’s age 0.018** 0.014* 0.045*** 0.001* 0.000 0.002* 0.000 0.000 0.000
Household size 0.164*** 0.161** 0.210*** 0.001 –0.001 0.007 0.002 0.003 0.001
Any child is
0.616* 0.645* 0.148 0.046 0.053 –0.007 0.010 0.028 –0.015
working
Females’ share in
–0.58* –0.528 –0.932* 0.015 –0.001 0.060 0.017 –0.008 0.065*
working age
Owns the dwelling –0.231 –0.213 –0.434 –0.004 –0.003 –0.016 0.000 –0.003 0.001
Taken credit of birr
–0.639* –0.555 –0.967* –0.030* –0.02 –0.055* –0.025* –0.01 –0.033
500 or more
Has migrant
–0.197 –0.06 –0.655* –0.009 –0.006 –0.016 –0.003 –0.016 0.012
members
300
Received
international –0.762** –0.882** –0.312 –0.016 –0.008 –0.062** –0.03 –0.035 –0.030**
remittances
Shocks faced: food
0.131 0.345 –0.309 0.027* 0.015 0.082* 0.035* 0.016 0.068*
price rise
Shocks faced: non-
–0.105 –0.153 –0.018 –0.012 –0.013 –0.002 –0.018* –0.018 –0.024*
price
Community: gov’t
–0.454* –0.599* 0.007 –0.016 –0.031* 0.046 –0.003 –0.014 0.020
primary school
Community:
–0.478* –0.388 –0.343 –0.003 0.001 0.003 –0.003 –0.016 0.013
microfinance institution
Community:
0.052 0.286 –1.349 –0.006 0.005 –0.166 0.014 0.018 –0.048*
daily/weekly market
Living in small town 1.009*** - - 0.014 - - 0.005 - -
Region: Amhara1 1.389*** 1.296*** 1.398 0.026 0.027* 0.161 0.008 0.006 0.024
Region: Oromia 1
0.806* 0.748* 0.768 0.009 –0.004 0.147 0.003 –0.016 0.034
Region: SNNP1 0.596 0.388 1.054 0.023 0.002 0.190* 0.023 –0.02 0.060
Region: Tigray 1
0.538 0.626 0.405 –0.013 –0.005 0.116 –0.011 –0.02 0.013
Region: All others1 0.623 0.426 - 0.025 0.058 - 0.057 0.113* -
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Constant –2.384*** –2.421** –1.283* 0.054 0.080** –0.073 –0.007 0.019 –0.016
Number of
1,625 1,214 411 1,625 1,214 411 504 288 216
observations
Notes: *, ** & *** show statistical significance at 10%, 5% & 1% levels, respectively. 1Comparison group: Addis
Ababa. Multidimensional inequality is proxied by a squared variation of the household deprivation score from the
average. SNNP=Southern Nations, Nationalities and Peoples. All observations are weighted to make estimates
representative. Standard errors are not reported for brevity; they can be available upon request.
302
CHAPTER SIX
Synthesis, Conclusion and Policy Implications
Getachew Diriba1 and Degye Goshu2**
1
CEO of Ethiopian Economics Association from December 2019 through
December 2020 during the design and production of this study. Currently
he is an independent researcher.
E-mail: gdiriba@yahoo.com
2
** Senior Researcher, Ethiopian Economics Association.
E-mail: degye.goshu@eea-et.org
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6. Synthesis, Conclusion and Policy
Implications
6.1. The Interface of Population, Urbanization,

Welfare and Economy
As introduced in Chapter one, State of the Ethiopian

Economy 2020, or simply ‘State of the Ethiopian Economy’ (SEE),
is a flagship project of the EEA which will be issued every year
and it replaces the former Annual Report. The SEE is conceived
as a dynamic and living document which looks into not only the
current and the past economic performance but also assesses the
future diagnostics of social and economic agenda. It is an
expression of EEA’s responsiveness to the comments and
suggestions of its clients and partners, and a realization of change
with the time thereby offering realistic and informative social,
economic and policy analyses. It aims to contribute to a deeper
understanding of social and economic issues and inform
policymaking, contributes to the design of operational programs,
investment options, and initiates further research and debate, and
serves as an important reference document.
While the themes of the present study contain four sectoral
areas, however, the SEE is a single, interlinked and holistic study
bringing salient features of population, migration, urbanization
and welfare to be informed by and further informing
macroeconomic economic development. For this reason, inter-
sectoral coordination in terms of conceptual, methodological and
analytical coherence; avoiding redundancies; and supporting
cross-reference are taken into account throughout the analysis and
write-up of the book and the chapters.
304
To an extent data permits, the ambitions of the study is to

trace back 10 years and look 10 years into the future end beyond.
Again, contingent on data availability, spatial and gender
dimensions including urban/rural dynamics, and pull-push factors
are incorporated into the study. The report keeps in mind
policymakers, program planners, investors, development partners,
and researchers/scholars. In keeping with demands of EEA
readers, the report blends robust conceptual and methodological
approach with ease of accessibility to non-economists.
The four interlinked themes discussed in the preceding
four chapters are the study of the interrelationships among
population (rural urban, migration) on the one hand, the national
economy, and overall welfare of Ethiopians on the other.
Typically, existing research appears to have focused on a single
sector analysis without seeking for how a particular sector
interfaces with other sectors. Similarly, most policy issues are
excessively focused on the macroeconomy, an aggregate national
output, the national ‘the pie’. Contrastingly, very little efforts have
been exerted to understand how population has evolved overtime,
spread geographically and how population is organized, that is,
rural, urban, migration and urbanization processes. Population in
all its spatial manifestation is the ‘denominator’, the divisor of the
pie. Welfare then is the measure of the national pie and its
population. It is not just the population size that must be studied,
but also the urbanization processes that is as equally relevant.
Urbanization offers an opportunity for a concentrated service
delivery of education, health, roads, and basic utilities. For this
reason, urban population demands for and often forces politicians
to pay attention at the expense of the remote and sparsely
populated rural population. Furthermore, when/if population
growth and urbanization are not coherently and strategically
305
managed, it can lead to urban sprawling, and unbalanced national

development discourse.
There are three overarching conceptual underpinnings that
help clarify the relationships among population, the economy and
welfare. First, the most enduring theory was advanced by Thomas
Malthus in 1798 postulating that population grows geometrically,
while food supply only increases arithmetically (Malthus, 1798).
If left unchecked, this causes the population to outstrip food
supply, which leads to a ‘Malthusian catastrophe’. The resulting
policy proposition has been to keep the population growth in line
with food supply, either by placing limit on the growth of the
population (for example, by lowering the birth rate which is
preventive checks), or a natural restriction that limits the growth
of the population by increasing the death rate (positive checks).
The underlying assumption that population continues to grow
indefinitely, and food production would not keep pace with
population growth has not come to be true. Production continues
to expand beyond the Malthusian imagination benefiting from
successive technological changes over the past century, and still
there are a constant quest for expanding the frontier of production.
On the population side, despite population boom
benefiting from health sector improvements, fertility rate as well
as population growth rates have declined among populations in
advanced economies. In fact, natural increase in population is
below a natural replacement rate (that is birth rate is lower than
death rates) thereby leading to declining population. In contrast, in
most developing economies, growth in population exceeds that of
growth in food production; this is not because of limiting natural
resources, but because of the way developing countries have
approached changes in technology, and the resulting fear of
creative destruction.
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As readers may notice from Chapter 4, early pattern of

population transition appears to be emerging in Ethiopia, although
inconclusive, that total fertility rate (being the number of babies
born to females during their productive age) has declined from 7.1
in the 1990s to 5.2 in 2020 in rural area; whereas it has declined
from 6.6 to 4.6 in urban areas. Historically, Ethiopia’s population
growth rate was 1.87% in in 1950s, 2.73% in 1970s, 3.66% in
1990s and 2.57% in 2020. While the long-term population growth
rate shows a slight decline compared to past decades, it remains
one of the highest. At this point, it is not sufficiently clear whether
or not ‘demographic transition’ is taking place in Ethiopia.
On the other side, agricultural production and productivity
have continued to grow close to and/or below population growth
rate and expanded demands for food supplies. Ethiopia is lagging
entry into the full-scale modernization of agricultural and allied
sector technologies. As such, the Malthusian bomb cannot be ruled
out unless Ethiopia earnestly works in multiple fronts of
technological change.
The second, and as equally prominent scholarship on
population was advanced by Boserup that stipulates “…human
societies have had to face the problem of inter-relationship
between population growth and food production (Boserup, 1965).
There are two fundamentally different ways of approaching this
problem. Boserup’s theory suggests that population change in
primitive societies will lead to agricultural intensification with
resulting increase in production. This counters Malthusian
hypothesis. However, Boserup’s model also faces severe
limitation as the case of Ethiopia presents, that is, population
pressure has not yet induced advanced technological adoption, at
least for now. In spite of a continued increase in production both
from expansion in area cultivated as well as limited use of
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agricultural inputs smallholder farms are saturated and no longer

absorbing new entrants into agriculture (see Diriba, 2018). As the
second chapter in this study presented (see Chapter 4), rural to
urban migration is taking place on an increasing scale; land
carrying capacity and labor productivity have reached a
diminishing return under the prevailing agricultural technologies
and practices. The combined effects are that there are numerous
rural and urban population who are faced with chronic and
transient welfare deficits across range of variables including food,
housing, water, fuelwood, and other essential expenditure for life
(see Chapter 5 on urban welfare section).
The third framing of population issue is one that is focused
on policy prescription and advocating for labor-intensive
approach. The labor-intensive prescription is very appealing to
politicians and policy planners, especially in economies
dominantly rural and agriculture, and where manufacturing is at a
low level. Implicit in such a prescription is of the fear of
technological change and its consequences of replacing labor-
intensive traditional methods of production, hence loss to labor.
The key question is what exactly is ‘labor-intensive’ approach? A
standard description of labor-intensive is provided as an industry
or sector in which goods or services are produced with a large
amount of labor, requiring a large number of employees in order
to be successful. Labor intensity may be quantified by taking a
ratio of the cost of labor (i.e., wages and salaries) as a proportion
of the total capital cost of producing the good or service. The
higher the ratio, the higher the labor intensity. In their natural state,
labor intensive industries include agriculture, mining, and
services.
Employment issue must now be seen along with the
population dynamics discussed in Chapter 4. While the population
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pyramid has somewhat varied across the decades of 2007, 2017,

and the projected 2027 and 2037; however, it is evident that in
2007, the shape of population pyramid was wide at the bottom in
rural areas and bulges at 15-24 years of age in urban locations. Ten
years later, in 2017, rural age pyramid has remained wide-base
with a step pyramid and gradually narrowing after 59 years. Urban
population pyramid bulged at 10 to 34 further expanding the
‘youth bulge’. The projected population for 2027 and 2037 shows
bulging of 10-34 in urban area and continued wide base for rural
area. Population bulge for specific age groups, especially in the
middle (10-34) and increasing at the top has a number of important
policy and development implications. The population bulge in the
age range of 10 to 34 represents a reservoir of opportunities as well
as developmental challenges. The youthful population both in
urban and rural areas represents a continual reservoir of labor
supply for a foreseeable future. As Ethiopia strives to join the club
of countries referred to as ‘Low-Middle-Income’, it must harness
the vast labor force for development opportunities. The underlying
assumption or consideration is that Ethiopia will focus on enacting
quality education merged with digital technologies to energize
dynamic, innovative and skillful workforce that Ethiopia requires.
However, the reservoir of youthful population can also signal
challenges to the nation if economic transformation is not taking
place at speed and scale to meet the growing demand for
employment and other services. Ethiopia will have to contend with
the vast rural reservoir of labor supply for many decades to come.
The question is whether Ethiopia is deliberate in its policy
managing emerging tension among population, urbanization, the
demands for employment, food, and other basic services.
The proponent of the labor-intensive policy is likely to be
at a collision course with technological change and the desire for
309
an integrated and multisector transformation. For example, a study

by the International Labor Organization (ILO) notes that “… many
African countries experienced a growth revival, some with
exceptionally high growth rates. Yet the record of decent
employment creation and poverty reduction has been very
disappointing. So, something is wrong with the focus on growth
per se, and with the prevailing patterns of growth. What is it? And
how can policy better respond to the challenge? Do African
countries need a new more efficient and more balanced growth
strategy? How can such strategy be promoted? … The policy
challenge ahead is twofold: (a) to accelerate and sustain economic
growth in the context of an increasingly volatile international
environment; and (b) to make growth more inclusive and job-rich,
enhancing the resilience of local households and local enterprises
and upholding social and political stability” (ILO, 2011).
At the most fundamental level, Ethiopia cannot be, and it
is not, an isolated island of technology; it is feasible to make a
successful transition from the traditional to modern technologies
without forgoing employment opportunities. Secondly, economic
growth fueled by technological change and transformation is not
at odd with labor employing ambitions. That is, economic growth
due from multisectoral transformation will be a labor employing
across sectors. As Diriba (2020) contends, “At the most
fundamental level, Ethiopia’s problem has been the way it has
ignored the scientific progress that has provided economic and
social solutions, eased human hardships from want of food,
improved and accelerated transportation, invented tractors and
harvesters that have eliminated the need to depend on the
backbreaking antique farming methods and making agriculture
work easier and more enjoyable (Diriba, 2020). The traditional
factors of production, land, labor and capital, have now been
310
merged with the knowledge system. The real difference between

the rich and poor countries is no longer only endowment of the
factors of production as they used to be; rather it is how effectively
nations, and people, utilize knowledge. Knowledge, that is
scientific invention, technology, innovation, and the internet are
all growing at an accelerated rate leaving far behind countries such
as Ethiopia.”
Dependence on the traditional practices presents
important challenges of meeting the Sustainable Development
Goals (SDG), the global aspiration that commits to end hunger and
poverty in all their forms, among the 17 SDG goals. The lagging
technological change highlights the deficient nature of Ethiopia’s
growth and raise some doubts about its sustainability. As discussed
in Chapter 2, Ethiopia’s aggregate growth (GDP) primarily came
from the non-economic sectors, namely, construction (27%) and
services (41%), and the contributions of the real economic sectors
is distant second with agriculture (25%) and manufacturing (7%).
Furthermore, the service has the highest share of gross valued
added with 40% in 2019 with the agriculture sector contributing
33%. All of these portends to a steep slope Ethiopia will have to
climb to facilitate rapid growth of the real economy to mitigate the
prevailing inflationary pressure.
Ethiopia’s investment in human development such as in
health service coverage, reduction in child mortality, increase in
life expectancy at birth, access to clean water, primary school
enrolment and literacy have been remarkable; however, these are
militated by high multi-dimensional poverty indices including
severe deprivation in cooking fuel, housing, food, sanitation and
other non-food poverty. That is why national indicators are littered
with inadequate food intake and resulting stunting and wasting.
311
6.2. Findings and Policy Options
Several policy implications and key messages emanate

from the interlinked studies of economy, urbanization, migration
and population dynamics, and multi-dimensional poverty and
inequality in urban areas discussed in preceding chapters.
Ethiopia, in economic terms, will have to make a renewed
commitment to a broader micro- and macroeconomic agenda,
including a coherent population and urbanization strategy,
transformation of productive sectors of the economy as well as
domestic resource mobilization all of which are the necessary and
sustainable means of financing both for the attainment of the SDGs
and national social protection floors. Currently, Ethiopia’s
domestic resources mobilization, especially, taxation is at very low
level although it has improved over the past years.
The government’s ongoing policy and program articulation
embodied in the Homegrown Economic Reform as well as Ten-
year Development Plan aspire to induce structural transformation.
How Ethiopia will push the transformation agenda across all
sectors, especially focusing on agriculture and manufacturing as
engine of transformation at the expected speed and scale of action.
A genuine commitment to removing technical and technological
barriers are prerequisites to putting Ethiopia on the developmental
path of sector-wide transformation. For Ethiopia, transforming
agriculture and the manufacturing sectors is prima facie action that
has the capacity to fuel other sectors, reduce expenditure on food
and keep wage inflation in check.
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The employment agenda

Ethiopia will continue to experience massive working age
population bulge over the coming decades as can be gleaned from
Chapter 4. The wide-base population pyramid of rural areas will
continually release large number of job seekers into urban areas
both as a push and pull-factors. The demand for jobs must be
matched by a rapid economy-wide transformation that creates new
jobs as old ones are lost, especially in agriculture. For this reason,
policymakers and development practitioners must aim, not only
for aggregate GDP metrics, also at inclusive economic and social
opportunities for all, including a decent job for all, a floor social
protection system and improving the wellbeing of the population.
The sector-specific development interventions and
macroeconomic guidance that have been initiated over the past
decades must continue with fervor and speed. Managing the
dynamics of population, the youth and the working age population
bulge, and the resulting incessant demands for employment will
likely precipitate in massive population movements within rural
and from rural to urban areas. Establishing a policy and operational
framework for local development (woreda, kebele, small towns,
municipalities) and putting in place effective accountability
system at all levels of organizations are necessary to resolving the
dynamics of population and economic interaction.
The employment challenge for Ethiopia will continue to
mount as a result of rural to urban migration: both push factors due
to diminishing rural land, the drudgery of agriculture, and
expanded educational opportunities, and pull factors such as job
opportunities and the allure of better conditions in urban areas.
“Job creation”, rather, creating job opportunities better fits the
characterization, must come from both the public and the private
sectors and by diversifying the economy, and promoting inclusive
313
development opportunities at local levels. For example, Ethiopia

will have to wake up to the urgent tasks of developing and mapping
out urbanization policies with decentralized and guided
urbanization strategies. Of course, urbanization cannot take place
as an isolated agenda in itself; rather, it must be combined with
rapid and at-scale structural transformations across all sectors of
the economy. Economic transformation that encompasses
population and urbanization is crucial for inclusive and sustainable
development in line with the SDG ambitions and better welfare
outcomes for all Ethiopians, be it in rural or urban locations.
‘Job-creation’ initiatives currently pursued at the Federal
and across the Regional States to encourage and support self-
employment plays, in the short- to medium-term, a key role in
improving livelihood of a vast number of workers. A long-term
policy and program framework must be devised that will help
produce wage-employment, family businesses, small businesses,
and aim to promote a better living and working conditions for all
Ethiopians. It is important that employment creation should
symbiotically coexist, promote technological adoption and
enhanced structural transformation within and between sectors.
Policymakers and development planners must get out of the
traditional mindset of “labor-intensive” proposition, and must now
recognize that job lost in an existing activity will give rise to many
more other activities; for example, efficiency gains in agriculture
will release large labor surplus, however, the surplus labor will
find new employment in services, manufacturing, construction,
and others.
Agriculture employs two thirds of the working force
followed by services of 21% while industry employs the remaining
10%. However, the service sector is the highest contributor to GDP
overtaking the historical dominance of agriculture. These
314
phenomenon results in expansion of urban informal sector and

extreme wage inequality. Women workers are disproportionately
represented in the informal economy and being marginalized from
the benefits of urbanizations.
Governing urbanization and population

As discussed in chapters 3 and 4, urbanization and
population agenda have not entered into the national development
discourse as a priority, nor are there policy and developmental
imperatives to guide urbanization, and encourage small town
development at a local level with the goal of offering local level
migration and offering better incentives than to migrating to major
urban centers. It has become clear that Addis Ababa is the primate
city with distant seconds of other regional towns. As Chapter 3
presented, the number of cities with population of more than
20,000 has increased from 22 in 1984 to 85 in 2007 and projected
to increase to 442 cities by 2037. Furthermore, some 42.4 million
people are expected to live in towns and cities by 2037, nearly
doubling the present urban population of 22.88 million. Addis
Ababa is 11 times larger than the second largest city with more
than 4.79 million inhabitants (if the present Addis Ababa
population to be taken seriously). Rapid urban growth is on the
rise, but national development agenda and policy frameworks do
not appear to be equipped with the required economic and social
structural transformations.
Ethiopia must contend with the rising demands for
services and essential supplies including food, health, education,
water, housing, cooking and lighting energy supplies. As noted in
chapter 3, 471,000 housing units are required annually for the
rapidly expanding urban centers. This does not include the need to
improve rural housing and emerging village development which
315
are the breeding ground of urban development. Already, supplying

housing for urban population, especially in Addis and major urban
towns, is the major challenge, and the rising rental cost of
residential unit constitutes a significant proportion of wage
income, to a large measure contributing to inflationary pressure.
All of this signifies the challenge of growing demands for housing
and other services. The stern shortage of formal urban housing
results in unplanned urban sprouting and proliferation of
secondary markets of urban land and housing (what is officially
referred to as urban land invasion). The study also shows that
urban areas are facing shortage of infrastructures and housing,
concurring with the report by the Ministry of Urban Development
and Housing (MoUDH) (2016) that highlights deficits in housing,
infrastructure, and services, very high unemployment and
inequality, and an increasing homelessness (MoUDH, 2016). The
prevailing low level of urbanization, in relative terms, is an
opportunity to harness the potential of urbanization through pro-
active policy guidance and masterplan development including
strengthening urban planning and investing in institutional
development and capability.
Urban centers in Ethiopia are evolving and expanding at a
much faster pace than ever, although from low base. The rapid
urbanization requires actively planned and managed functions to
unlock the potential and facilitate inclusive development.
Monitoring the current urban expansion must be the top priority
for the government as the institutions in charge are publishing a
series of strategy documents and proclamations. However, most of
the policy documents in this regard are less effective and not
informed by rigorous evaluations.
316
Rethinking welfare as investing in people

Ethiopia already is a home to millions of vulnerable
populations with regularized welfare assistance in the form of
PSNP, and humanitarian assistance as non-contributory social
program. The non-contributory social program is necessary but
unlikely to be sustainable as a single-track approach without
introducing contributory social protection in rural and urban areas
across the nation. Sustainable economic and social development
requires effective welfare policies as key investment in human
development and a contribution to growth, productive
employment and decent work. Such efforts to create a more
sustainable and inclusive social protection require the investment
in the human capital of the population throughout the life cycle
through access to health, education and other social services, as
well as at least a minimum level of income security that empowers
people to engage in productive employment and income-
generating investments.
An expanded and coordinated social protection
mechanism in Ethiopia presents policy challenges. The social
protection must now be conceived as part of the broader social
security, which includes the establishment of national social
protection floors, emphasizes the importance of investing in
people’s social protection as a means to achieving substantial
progress in poverty reduction and to realizing human right to social
security. Such investments will help Ethiopia to develop the full
productive potential of the population, contribute to the
formalization of employment, support economic and social
change, foster sustainable and equitable growth, reduce
vulnerability and boost economic and social development.
317
Data availability
The four thematic topics treated in this study reveal
inadequacy of data expressed in time series, spatial disaggregation,
and consistency overtime. In some cases, data is rarely available,
for example, Ethiopia does not have data on population migration
nor is there a system to monitor it. Furthermore, where data is
available, it is at a regional level; rarely is data available at woreda
and Kebele level. No data is available, nearly for all economic and
social variables, at local level (kebeles, rural towns,
municipalities) nor is there organizational readiness to do so. The
Central Statistical Agency (CSA) must be capacitated to undertake
data collection at the disaggregated levels commensurate with
Ethiopia’s development demands. With more regions being curved
out, boundaries of woredas (districts) are being modified
incessantly which presents challenge to time series data analysis
and resulting policy and development guidance.
Without timely, accurate, country-representative and
disaggregated system of data availability nationwide, it would be
very difficult, if not impossible, to sufficiently guide national
development. The rapid urban expansion is a complex set of
factors which requires comparable high-quality data and indicators
and advanced analytical skills and knowledge. For this reason, it
is critical to strengthening data-collection capacity.
6.3. Specific Recommendations
Based on the findings of the four studies, the following

specific recommendations and policy implications are generated:
318
Macroeconomic development
1. Designing a differentiated support system to enterprises: To
enhance structural transformation towards the manufacturing
sector, there is a need for a special support scheme aimed at
boosting productivity and competitiveness of the sector. The
current support system to enterprises in Ethiopia is uniform
without consideration of the risks and competitions the
enterprises face. The manufacturing industries face stiff
competition from imports. Moreover, it is prone to expensive
logistics as it continues to be import-intensive. Hence, there is
a need to design a differentiated support system to sectors
based on the particular challenges they face. This would
increase the share of the manufacturing sector in employment,
GDP and exports.
2. Shifting towards development policies and interventions led
by the private sector: Low TFP with high capital accumulation
may indicate inefficiency of large public investments and
points to the importance of shifting to private-led investment
to sustain the recent growth momentum. While the
government has reiterated its commitment to make the private
sector an engine of growth and development, in practice there
has been little changes in recent years as the public investment
continues to dominate which crowds out credit and foreign
exchange access to the private sector. It is imperative to
address the financial repressions of the private sector for
ensuring sustainability of the growth momentum.
3. Matching skills of the labor force with the needs of
industries: With high urban unemployment and under-
employment and with low wages of the employed on both
rural and urban, mismatch of skills in the labor market is a key
challenge that requires interventions as industries continue to
319
struggle to find appropriately skilled workforce despite large

number of graduates from higher education and TVET
systems. Not only is there a poor quality of training and
education; but also, the skills being produced are not the skills
required by the industries in the economy. A skills anticipation
system is required to ensure alignment of skills supplied and
those required by the industry.
4. Investigating the underlying drivers of inflation in Ethiopia:
The current high inflation in Ethiopia is not only depleting the
welfare of consumers, but also firms as they have pressure to
increase salaries expected to affects their competitiveness. A
prudent monetary policy will play key role in curbing
inflation. There is also a need to check on inefficient large
government investments which fuel inflation without
considerable gains for the economy. The intervention on
improving agricultural productivity is also vital as it is directly
related to the prospect of food inflation. For all these
interventions, it is advisable to first conduct a diagnostic study
of the drivers of inflation in the country.
Urbanization and development

5. Addressing economic and social constraints: the current
investments in industrial parks led by the government and
economic growth corridors are expected to bring remarkable
growth rates in the economy. Ethiopia’s structural
transformation is very slow mainly due to the slow growth of
the production sectors (like industrial sector and agriculture)
and rapid growth of the service sector, leading to inflationary
processes. Rapid urbanization with slow structural
transformations is going to exacerbate the negative
externalities such as poor quality of education and health
320
services; urban poverty; and weak public transport services.

Most cities in Ethiopia have low density but demonstrate urban
sprawl (Gebre-Egziabiher and Yemeru, 2019). This leads to
inefficient mobility within the cities and affect the costs and
rents of residential and business properties (World Bank,
2019). A properly planned and managed urbanization plays a
crucial role in eradicating poverty and improving quality of
life by providing better education and health services and
improved infrastructures with equitable access to all.
6. Improving the capacity of local administration: To realize the
potential of cities, development and equitable distribution of
services and infrastructures should be taken into consideration.
Well-developed infrastructures create conducive
environments to accelerate economic development.
Strengthening local urban governance with the necessary
incentives to municipal finance improves quality of urban
services. Hence, priority should be given to strengthen urban
local capacity that enables investment and generating finances
for infrastructures and services by involving the private sector.
An improved recognition and engagement of the private sector
in private-public cooperation modalities enables to enhance
planning and delivery of urban services.
7. Planning and land-use policy: Urban planning in Ethiopia is
poor and inadequate, characterized by inefficient land
management and complicated laws and regulations (Gebre-
Egziabiher and Yemeru, 2019). There is weak compliance to
land-use and transport measures and the expansion of informal
markets for land and housing and urban sprawl. Which has a
direct effect on the city’s municipal revenue, residents’ cost of
living, mobility in the city and values of urban ecosystems and
biodiversity. A long-term urban territorial and land-use
321
planning is required, taking into account the short-term

dynamisms of socio-economic development and the
associated modalities of monitoring and evaluating strategies.
8. The need for quality and research: Given the complex nature
of urban areas and rapid urbanization prevailing in Ethiopia,
capacity building in quality data collection, research and
policy analysis should be given top priority by the government
authorities.
Population dynamics
9. Recognizing the distribution and scale of rural-urban
migration: The scale of rural-urban migration is expanding in
Ethiopia with significant difference across regions. This
requires a strategy to maximize the benefits of rural-urban
migration while at the same time reducing the risks that
includes sensitization of local authorities and law enforcement
bodies to better understand the concept of mobility and
migration and the reasons behind it.
10. Gender-responsive measures of addressing rural-urban
migration and unemployment: Many migrants seem they face
a lot of difficulties linked to accessing education and
employment opportunities, particularly, women. Policies that
address the needs of the migrant labor force in general and
migrant women in particular are needed in order to harvest
maximum benefits from their contributions.
11. The need for training of the unskilled labor force: As most
migrants are unskilled youth with limited education, they are
employed in the informal sector. There is need to improve their
skills through access to vocational and technical training, as
skilled migrant workers will lead to a greater productivity and
economic growth.
322
12. The need to diversify employment opportunities: Youths

migrate from rural to urban areas due to lack of farmland.
There is an urgent need to diversify economic opportunities
available to youth in rural areas by setting up agro-allied
industries in rural areas for providing job opportunity and
ensuring the integration of the youth to the rural cash economy
with bright future.
Urban welfare
13. Addressing disparity and ensuring equity: Parametric
evidences imply policies advocating gendered interventions,
family planning, and provision of education, credit and
employment opportunities. On the other hand, the findings of
notable disparities among regions and higher rates of
deprivations, monetary poverty as well as multidimensional
poverty and inequality in small towns call for installing fair
distribution systems. Given that poverty and inequality are
found to fall with urbanization, a policy direction towards
planned urbanization is also recommended.
14. Access to credit for poverty reduction: Creating household
access to microcredit and other sources of finance is another
vital strategy. The National Bank of Ethiopia needs to promote
innovative forms of microcredit access to the poor by the
financial institutions. Stabilizing prices, especially of food, has
effects on all forms of poverty and inequality. As the link
between economic growth and poverty reduction is not perfect
and with undesirable effects on inequality, redistribution
policies including social protection programs for those in
severe welfare deprivations may also be useful.
323
15. Revising welfare measurement and monitoring methods:

The monetary methods of welfare measuring and monitoring
being employed by the Ethiopian Government relies only on
expenditure-based poverty and inequality indices. And ignores
the non-monetary dimensions of welfare. The measurement
and monitoring of multidimensional welfare help in aligning
the overall welfare measures to the SDGs (target 1.2) and track
progress from the HDR.
324
References
Boserup, E. (1965). The Conditions of Agricultural Growth.

London, George Allen and Unwin.
Diriba, G. (2020). “Agricultural and Rural Transformation.
Obstacles, Triggers and Reform Considerations”. Policy
Working Paper No. 01/2020. Ethiopian Economics
Association.
ILO, (2011). “Efficient Growth, Employment and Decent Work in
Africa: Time for a New Vision Employment”.
Malthus, T. R. (1978). “An Essay on the Principles of Population”.
325

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Ethiopian Economics Association

Printed in Addis Ababa, Ethiopia

No part of this publication may be reproduced, stored in a retrieval

The analysis and policy recommendations of this Report do not

Inquiries should be addressed to:

Ethiopian Economics Association

2.2.3. Export Trends .....................................................38

3.1. Introduction ...............................................................94

4.5.1. Summary and Conclusions ..............................212

CHAPTER SIX .......................................................................303

Table 2 1: Export shares by sector ..........................................40

Table 3.1: Evolution of city-size group by year, 1984-2037.117

Table 4.1: Categories of explanatory variables ....................170

Table 5.1: Dimensions, indicators, weights and deprivation

List of Appendix Tables

Table A1: Distribution of urban households interviewed in

Figure 1.1: Interrelationships among population dynamics,

Figure 2.18: Real GDP trends: linear forecast (Million of ETB)

Figure 3.1: City-size by Regional States, 1984-2037 ............123

Figure 4.1: Trend in Total Population size and Growth Rate:

Figure 4.9: Growth rate of total population and working age

Figure 5.1: Deprivations in monetary and nonmonetary

Figure 5.6: Effect of universal coverage of publicly provided

List of Appendix Figures

Figure A.1:Density curves of weighted deprivation scores in

Ethiopian Economics Association (EEA) is a non-profit,

thereby offering realistic and informative social, economic and

investors and development partners to renew their commitment to

Tadele Ferede (PhD)

Linkages among Economic Development,

Mengistu Ketema1 and Getachew Diriba2

This chapter of State of the Ethiopian Economy 2020

• Economic productivity and competitiveness;

The SEE is conceived as a dynamic and living document

chapter, therefore, explores the conceptual and policy

1.2. Conceptualizing Population, Economic

While the themes of the present study contain four sectoral

1.2.1. Developmental Discourse

is the ‘denominator’, the divisor of the economic pie. Welfare then

Although urbanization generally contributes to economic

urbanization, for example, are not managed properly, growth of

Figure 1.1: Interrelationships among population dynamics,

As Todaro and Smith (2015: 164) pointed out, ‘many

On the population side, despite population boom

rate and expanded demands for food supplies. Ethiopia is lagging

productivity have reached a diminishing return under the

in the economic sectors, and growing demand for employment

1.2.2. Population, Urbanization, Migration, and Economic

Migration reinforcing urbanization

Urbanization reinforcing migration

urban areas could be among pull factors to rural people to migrate

Urbanization and welfare

commonplace, which often displaces poorer city-dwellers who

Migration and poverty

cultural factors may influence the propensity of women to migrate

In addition to the poverty levels in the destination urban

the movements are known. Thus, if poverty is indeed the result of

1.3. Organization of the Book

This book - State of the Ethiopian Economy 2020 - explores

Agyei-Mensah, S. and Owusu, G. (2009). Segregated by

Murillo, F. (2017). “Migrants and Rapid Urbanization: A New

Tacoli, C., McGranahan, G., Satterthwaite, D. (2014).

Macroeconomic Outlook, Structural Change